Remember the saying, "Don't put all of your eggs in one basket"? The old adage summarizes the importance of diversification in a nutshell (or maybe in an eggshell). Diversification doesn't eliminate your risk but can help lower the odds of significant losses.
At first glance, you might think that Warren Buffett is a proponent of diversification. His Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.43%) holdings include nearly 50 stocks across a variety of industries. But while the legendary investor doesn't have all of his eggs in one basket, a disproportionate number of them are. Why has Buffett invested 44% of his portfolio in just one stock?
Image source: The Motley Fool.
The apple of Buffett's eye
That stock in which so much of Berkshire's money is invested is Apple (AAPL 0.43%). Berkshire's position in the tech giant currently totals close to $150 billion.
Buffett first initiated a position in Apple in the first quarter of 2016. And he did so at the time primarily because of the influence of Berkshire's two investment managers, Todd Combs and Ted Weschler.
While it took Buffett a long time to pull the trigger on Apple, he clearly likes the company. In a 2020 interview with CNBC, he stated:
I don't think of Apple as a stock. I think of it as our third business. It's probably the best business I know in the world. And that is a bigger commitment than we have in any business except insurance and the railroad.
There are plenty of reasons why Buffett views Apple with such high regard. He has always loved strong brands and prefers to invest in companies with solid moats. The Oracle of Omaha also especially prioritizes consistent, long-term earnings growth. Apple delivers on all counts.
A big bet that's paid off in a big way
You might still scratch your head that Buffett has put so much of Berkshire's money into one stock. However, it's important to recall something he said years ago: "Diversification is protection against ignorance. It makes little sense if you know what you are doing."
Buffett doesn't have a problem investing heavily in a stock when he has a high degree of confidence in its underlying business. That confidence comes from a careful and detailed evaluation of the company's financials, management team, growth prospects, and competitive landscape.
Clearly, Buffett's big bet on Apple has paid off in a big way. An initial investment in Apple when Berkshire first bought the stock has increased by more than 6x.
The Oracle of Omaha seems to believe Apple has more room to run. Berkshire bought only four stocks in the fourth quarter of 2022. Apple was one of them.
Don't try this at home
I agree with Buffett that Apple is a wonderful business and a great stock. It's the largest stock in my portfolio, as well (although it's not anywhere close to 44% of my total holdings, and my amount invested is a wee bit lower than his investment).
There are several reasons why I think that buying Apple stock now is a smart move. The company has major opportunities in China and India. Its services business should be an especially significant growth driver for years to come. And Apple also has tremendous potential with new products, including its forthcoming augmented-reality headset and a rumored folding iPhone.
However, I don't think that most investors should put nearly as big a percentage of their money into Apple or any other single stock as Buffett has. Few people have the experience and expertise he does in evaluating businesses. And few have the financial cushion that he has if a decision goes awry.
Consider buying Apple, but also build a well-diversified portfolio. Your eggs and baskets are a lot different than Buffett's.
