Apple (AAPL -1.26%) and Tesla (TSLA 2.25%) are two of the top companies in the world. They both have strong followings and are profitable, growing businesses with strong fundamentals.
But despite its strong position and growth prospects in the electric vehicle (EV) market, Tesla isn't in the Berkshire Hathaway portfolio. CEO Warren Buffett is a big fan of Apple and that's Berkshire's top holding. Why isn't Tesla also in there?
Buffett values predictability
At Berkshire Hathaway's 2023 annual meeting, Buffett outlined the simple reason why he doesn't invest in most car companies: The industry is too competitive, and it's difficult to predict where a company such as Tesla will be.
What's important to Buffett is being able to know where a business will be in the future. Buffett said that he can't predict where automakers will be in the next five to 10 years but he has a much better idea of where Apple will be. While he didn't make a forecast for Apple, he alluded to the company's strong brand and its dominance in its industry.
Whether Tesla will be the dominant brand in 10 years is the big unknown. Buffett values a company that has a moat, a strong competitive advantage that can keep competitors away. He clearly does not see Tesla or another major automaker dominating to the point where it can make for a strong investment. Berkshire does own shares of General Motors but at 0.2%, it's a negligible size of its overall portfolio and Berkshire has been reducing its overall stake in the car company.
While Tesla has become profitable of late on a consistent basis, that alone is not enough to confidently know what its future will look like, especially given all the change happening in the industry.
AAPL Profit Margin data by YCharts
Berkshire's portfolio is filled with similar types of stocks
If you look through many of the top stocks in Berkshire's portfolio, you'll see a common thread: big-name brands that have a strong moat.
Apple with its loyal fanbase sits at the top. Other big brands include Bank of America, American Express, Coca-Cola, and Kraft Heinz. These are all examples of companies that are likely to remain leading brands and businesses within their respective industries, even a decade from now.
Whether Tesla or another automaker will be the leading EV maker is much more debatable. And therein lies the value that Buffett places on predictability and being able to spot quality businesses.
That doesn't mean that all of the stocks in Berkshire's portfolio fit that mold. After all, Buffett isn't doing all the buying for Berkshire. But many of his favorite stocks and largest investments follow that pattern of being profitable, predictable, and having strong brands.
What can investors learn from Buffett's approach?
The takeaway for investors is that if you're looking for a stock to buy and hold for years, you should have some reasonably strong confidence in where it will be five or 10 years from now.
One thing to remember is that Buffett also focuses on his circle of competence, on businesses and industries that he's familiar with, which is why he missed the boat on big tech stocks such as Microsoft and Amazon in their early days; he simply isn't all that comfortable with technology.
While it may have been difficult to predict they would be the big successes that they are today, if Buffett's circle of competence extended into technology, there's a chance they would have made it into Berkshire's portfolio years ago. Amazon is in there today, but it's a relatively small holding.
Apple is an example of a phenomenal business that's poised to dominate for years and that's why Buffett is a big fan. Tesla may turn out that way as well, but it's not nearly as easy of a prediction to make, and that's the key difference.
It doesn't mean that Tesla is a risky buy, only that there's more uncertainty about its future than there is with Apple -- according to Buffett, anyway.
If you want to invest like Buffett, you should be familiar with the industry you're investing in, and have a strong degree of confidence about where the company's future.
