Following the legendary investor has been a winning strategy for nearly six years.
When it comes to following prominent investors, track records matter. After 57 years as CEO of Berkshire Hathaway (BRK.A -1.93%) (BRK.B -1.39%), Warren Buffett has a long track record. It may also be the most successful investment record in history.
When Buffett took the helm in 1965, Berkshire Hathaway was trading at just $19 a share. Berkshire’s Class A shares (BRK.A) recently traded at a staggering $478,670. From 1965 to the end of 2021, shares of the sprawling conglomerate generated a compound annual return of 20.1%, compared with just 10.5% for the benchmark S&P 500.
Riding in Buffett’s tuxedo has been a winning strategy for longer than most of us have been alive. Clearly, paying attention to Berkshire Hathaway’s disclosures can pay off for patient investors.
Apple (AAPL 0.67%) is by far the largest holding in Berkshire’s portfolio. Buffett is notoriously uncomfortable with tech stocks, but he’s happy to tell anyone who will listen that Apple is a favorite thanks to some insurmountable competitive advantages.
Since its launch in 2007, the iPhone has been the most popular handheld device. Since the company doesn’t allow other manufacturers to access the way Alphabet licenses Android, it’s still in a league of its own.
The pricing power Apple enjoys over its devices is important, but it won’t be the company’s main source of profit for years to come. Buffett can’t get enough of Apple right now because he expects the services segment to grow strongly for years to come. Services revenue rose 17% year over year to $19.8 billion in the fiscal second quarter ended March 26, 2022.
If you currently own one of the more than 1 billion active iPhones and originally subscribed to an app through the App Store, Apple will likely keep 15% to 30% of your subscription cost. Apple earns revenue from more services than its App Store and works well. For example, Apple TV+ recently beat Netflix to become the first streaming service to win an Oscar for Best Picture.
Buffett also likes Apple’s commitment to returning profits to shareholders. In April, Apple’s board increased its buyback program by $90 billion, and the company also increased its quarterly cash dividend by 4.5%. In the first half of fiscal 2022, the company purchased and recovered $43 billion of its own stock. With the new $90 billion in licenses, that pace is likely to accelerate.
In 2019, Berkshire Hathaway began increasing its stake in Amazon (AMZN -1.31%). The stock surged early in the pandemic, but has lost about 41% since peaking last summer. To meet soaring demand in 2020 and 2021, heavy investment in fulfillment services resulted in a net loss of $3.8 billion in the first quarter of 2022.
Berkshire’s Amazon stake, which is only 0.4% of the total portfolio, is relatively small. However, over the next few months, I expect the scale of this ratio to increase significantly. E-commerce accounted for less than 15% of total retail sales in the first quarter, according to the U.S. Census Bureau, leaving Amazon’s consumer business with plenty of room to grow.
Amazon’s greatest strength is its ability to turn challenges into successful new businesses. For example, the company had to invest heavily in internet infrastructure to run its online shopping business. Rather than bothering at its own expense, the company launched Amazon Web Services (AWS) later in 2006. Today, AWS is the company’s most profitable division. AWS first-quarter revenue rose 37% year over year to $18.4 billion, with Amazon reporting $6.5 billion in operating income.
Amazon’s consumer business has previously been where it is now. The big difference now is that the company is backed by positive cash flow from the rest of its increasingly diverse business. With the funds to back the consumer business back to profitability, this is a great stock to buy and hold for the long term.