Warren Buffett is known for his top investment skills and performance over the long term. As chairman of Berkshire Hathaway, the billionaire investor has helped deliver compounded annual gains of nearly 20% over 58 years. That's compared to a compounded annual increase of a little over 10% for the S&P 500.
Buffett has built this success by investing in great American businesses in areas such as finance, consumer goods, and energy. Yet his biggest holding today is in an industry the billionaire investor generally doesn't heavily invest in: technology. In fact, this big investment is part of a group of industry-leading stocks investors have dubbed the "Magnificent Seven," referencing a 1960s Western and a more recent sequel by the same name. These stocks, each linked to technology, are: Alphabet, Amazon, Apple (AAPL -0.35%), Meta Platforms, Microsoft, Nvidia, and Tesla.
So, which of these market gems appealed enough to Buffett to make it to the top of his investment portfolio? Smartphone leader Apple. Shares of the company make up about 50% of the billionaire investor's $347 billion portfolio. Let's find out how and why Buffett built his stake -- and if you should follow him into Apple shares.
Image source: The Motley Fool.
Buffett's increasing ownership of Apple
First, the how. Buffett started buying Apple shares in 2016, and two years later, Berkshire owned more than one billion Apple shares -- for 5.2% ownership of the tech giant. Since that time, its ownership has increased thanks to Apple's repurchases of its shares; repurchases remove shares from the market, lifting the ownership of current holders. Today, Berkshire owns about 5.8% of the company.
Repurchases offer "a simple way for investors to own an ever-expanding portion of exceptional businesses," Buffett wrote in his 2020 shareholder letter as he referred to the Apple holding.
Now, let's get to the why. Why would Buffett, who generally doesn't focus on tech stocks, invest in a tech giant like Apple? Because the company just so happens to offer qualities Buffett loves in an investment: It's a well-run business, has a terrific moat, and offers investors an opportunity to share in its successes through its dividend payments.
Buffett surely likes the fact that Apple has significantly grown earnings and return on invested capital over time.
AAPL Revenue (Annual) data by YCharts.
This shows the company makes products consumers want, has successfully managed its costs, and has benefited from its investments over time. Buffett referred to Tim Cook as "Apple's brilliant CEO" in one of his shareholder letters, a sign the billionaire investor approves of Cook's decisions and plan for Apple moving forward.
Apple's solid moat
And this brings me to the subject of Apple's moat, or competitive advantage. Buffett loves companies with solid moats because they have an easier time staying in market-leading positions -- and that means they generally can maintain earnings growth without worrying about competition hurting their market share.
Apple's moat is its solid brand strength that keeps customers coming back regardless of price increases or the arrival of a rival product on the market. In the most recent quarter, Apple said a record number of iPhone users upgraded. And the company's install base of active devices, including all products, reached a high of 2.2 billion, showing this company founded in the mid-1970s continues to grow.
Finally, Buffett is a fan of dividends, and Apple is one of the tech companies that pays them. Buffett wrote in a recent shareholder letter than Berkshire's annual-dividend payment from Apple has averaged $775 million annually.
Of course, most of us don't have the resources of Buffett so can't count on collecting hundreds of millions annually in dividends. But any amount could be a welcome addition to our portfolios and help us grow wealth over time.
Is this Magnificent Seven stock a buy?
So, should we follow Buffett into Apple? Apple trades at a higher-earnings multiple than it did when Buffett started buying the stock, but the company's revenue has climbed, and revenue opportunities have broadened.
AAPL PE Ratio data by YCharts.
For instance, today, with such an enormous base of installed devices around the world, Apple is seeing its services revenue take off and reach record levels. That's as Apple sells various subscriptions -- from cloud storage to digital content -- to users. And this growth may just be getting started.
All of this means that today Apple remains reasonably priced considering its track record and future prospects. So, this Magnificent Seven stock at the top of Buffett's list makes a great buy for the rest of us too.
