Many investors have followed Warren Buffett for their entire lives. The 94-year-old investor and CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) has put together an incredible track record of strong performance, generating huge wealth for early investors in the conglomerate.
Yet with all that attention, Buffett and Berkshire generate a lot of hype. It's easy to get wrapped up in the eye-grabbing headlines surrounding Buffett, especially those that identify aggressively large investments in some promising companies.
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Many of the claims about Buffett's investment selections sound puffed up due to a failure to appreciate the full context of Berkshire Hathaway's operations. In particular, discussions about "Warren Buffett's portfolio" often look only at one relatively modest portion of Berkshire Hathaway's balance sheet without fully incorporating the entire business. As a simple example, one stock that is most closely associated with Buffett and Berkshire, Apple (AAPL -0.35%), makes up a significantly smaller portion of the company's total assets than you might think.
Berkshire's portfolio-within-a-portfolio
It's not uncommon to see headlines touting that Apple makes up half of Buffett's portfolio. That suggests both a willingness to make concentrated bets on a single stock and a heightened conviction in the future prospects for the iPhone maker. Certainly, Buffett hasn't shied away from making big investments at auspicious moments in his career.
Most investors pay closest attention to the publicly traded stocks that Berkshire holds as investments. As of the third quarter of 2023, those stocks made up almost $319 billion of Berkshire's assets. And with 915.56 million shares of Apple reported on its filings with the U.S. Securities and Exchange Commission as of Sept. 30, Berkshire's holdings amounted to almost $157 billion at the time -- indeed, almost half of that equity investment line on the Berkshire balance sheet.
However, Berkshire's assets include more than just the investments in equity securities that Buffett and his peers at the conglomerate make. Within the insurance business, which makes up the bulk of Berkshire's listed assets by book value, you'll find $152 billion in cash and short-term Treasury securities. Another $50 billion gets invested in longer-term fixed-income securities as well as investments in Kraft Heinz (KHC -0.55%) and Occidental Petroleum (OXY -0.15%) made under the equity method for accounting purposes. Even including just those assets, Berkshire's investment in Apple drops to around 30%.
An industrial empire under the radar
If you look only at the insurance business, moreover, you'll miss out on the backbone of Berkshire Hathaway's operations. The company has separated out its railroad, utility, and energy holdings into a different section of the balance sheet.
That part of Berkshire includes some of its best-known holdings. The Burlington Northern Santa Fe railroad has consistently generated the most profits within this segment. With more than 32,500 miles of track across 28 states and three Canadian provinces, BNSF is one of the largest railroads in North America. In addition, a 92% stake in Berkshire Hathaway Energy includes the MidAmerican Energy regulated utility. Berkshire's 80% controlling interest in truck stop operator Pilot Travel Centers also gets included here.
When you combine the listed assets of the railroad, utility, and energy segment and also add in tangible and intangible assets from the insurance business not listed above, the book value of Berkshire's assets adds up to nearly $1.02 trillion. The Apple position makes up about 15% of that total -- far less than 50%.
Yet the true impact of Apple is even smaller. That's because Berkshire is required by current accounting rules to update the book value of its publicly traded stock holdings to reflect market value each quarter. However, there's no automatic update of book value for wholly owned businesses.
For instance, just looking at BNSF, the railroad reported $92.6 billion in total assets as of Sept. 30. Revenue came in at $5.72 billion, with $1.7 billion in net income. That's roughly comparable to Union Pacific's (UNP -0.31%) $5.94 billion in sales and $1.53 billion in net income. Yet Union Pacific's market cap is nearly $150 billion.
Some analysts have estimated that BNSF would be worth as much as $200 billion if it were a separate publicly traded entity. If you make similar adjustments to other wholly owned businesses, the current market value of Berkshire holdings could approach $1.5 trillion, making the Apple position worth roughly 10% of that total.
Apple is important -- but not that important
Certainly, an investment position that makes up 10% of a company's entire assets is significant. Once you add up all of Berkshire's holdings and update their valuation to reflect current market value, that's likely what Apple represents to the Buffett-led giant. But it's important not to inflate Apple's importance -- or to draw incorrect conclusions about what the holding says about Buffett's views about investing overall.
