Why isn't Apple on Berkshire's list of permanent holdings?

文 | Grahamites

Editor丨Li Jian

The rapid pace of technology and the changes in capital allocation decisions that followed Cook's tenure are two of Apple's biggest potential problems.

Berkshire Hathaway's permanent ownership is extremely rare. In his 2023 letter to shareholders, Warren Buffett mentioned that Berkshire Hathaway added Occidental Petroleum and five Japanese conglomerates to the list of permanent holdings. However, Buffett did not say that he would hold Apple indefinitely, which is currently the company with the largest position in Berkshire.

Ever since I saw this news, I've been pondering why this tech giant isn't Berkshire's permanent holding?

Berkshire's perpetual holdings are extremely rare

First of all, looking at the history of Berkshire, it is not difficult to find that although Buffett has bought many stocks, only a handful have held them for more than 10 years. According to Markets Insider data, the 10 stocks he holds for the longest time range from 15 to 35 years (since the letter to shareholders summarizes last year, I added 1 year to the holding time). Some of these 10 stocks are still held by Buffett, such as BYD. However, there are only two stocks he has made clear that Berkshire will hold indefinitely, namely Coca-Cola and American Express.

Warren Buffett's strong commitment to these two companies speaks volumes about his confidence in the business models and growth resilience of these two companies. This observation raises the question of the distinction between Berkshire's perpetual and non-perpetual shareholdings. To answer this question, I revisited the four investment criteria of Warren Buffett and Charlie Munger and listed some similar criteria for permanent holding companies.

4 Possible Criteria for Perpetual Shareholding

We all know that Buffett and Munger chose four criteria for companies:

The business is simple and easy to understand;

Have sustained profitability;

Have a competent and trustworthy management team;

The share price is reasonable.

However, it is important to note that these four criteria are only used as guidelines for initial buying, and not as a perpetual holding criterion, which is different from the above four criteria.

In my opinion, the fundamental difference between perpetual and non-perpetual is whether a business needs a competent, trustworthy management to strengthen its moat. In fact, Munger and Warren Buffett often say that it's best to "invest in a business that a fool can run, because one day a fool will run it." The bar is much higher for a "dummy" business than it is easy to understand and has consistent profitability.

As for American Express and Coca-Cola, I'm not sure if the former meets the criteria of a "dumb" business, because in reality, American Express's business is quite complex and prone to mismanagement. But perhaps the reason for Buffett's confidence in him lies in the fact that he and the management of American Express know each other well. Of course, this is not enough to prove that Amex is a "fool-type" company, but perhaps for Warren Buffett, he can see the development of American Express.

Coca-Cola, by contrast, with its iconic brand and extensive distribution network, seems to have made it a "dumb and easy" business.

Another possible criterion for perpetual shareholding is that the business needs a track record of increasing dividends and buying back shares. The Coca-Cola Company has raised its annual cash dividend for 62 consecutive years, and the original share repurchase program began in 1984.

Now, we can try to list the criteria for Berkshire's perpetual shareholding:

The business is simple and easy to understand;

Have sustained profitability;

Fools can manage;

There is a track record of increasing dividends and buying back shares.

Does Apple meet the perpetual shareholding criteria?

With the above four criteria, we can assess whether Apple meets the conditions for Berkshire permanent ownership.

First of all, Apple's products are widely popular and have a loyal customer base. However, as a tech company, it still needs to keep innovating. The dynamic nature of the tech industry makes it difficult to assess the long-term comprehensibility of Apple's business and the solidity of its moat, as it must constantly adapt to evolving technology and consumer preferences to stay ahead of the curve.

Second, Apple is most likely not a "dumb" company. We can learn from the company's history in this regard. In the 80s of the 20th century, Steve Jobs was forced to leave his job, and under the leadership of then-CEO John Sculley, Apple almost collapsed. Although Scully was a brilliant manager, he knew very little about computers and failed to manage Apple in the way it needed to be at the time. It wasn't until Steve Jobs made a comeback that Apple came back to life.

However, it is worth noting that Buffett did not invest in Apple during Jobs' tenure as CEO, and he decided to buy Apple stock after observing Tim Cook's operational excellence and shrewd capital allocation decisions. By then, Jobs had been dead for many years. From this, we can see that Buffett does not think that Apple's business is "fool-proof".

In terms of capital allocation, according to Apple's investor relations website, Apple has been paying cash dividends since 1987 and has increased the amount of dividends in most years. However, the company's share repurchase program is relatively new, having been introduced in 2012 after Cook took over as CEO.

Interestingly, Buffett said that Jobs refused to buy back shares after consulting with him. This shows that Jobs was unable to allocate funds effectively, which may be one of the important reasons why Buffett did not invest in Apple during Jobs' tenure. At this time, it is unclear whether Apple will be able to maintain a smart capital allocation strategy after Cook's eventual retirement.

All in all, the rapid pace of technology and the change in capital allocation decisions since Cook's tenure are two of the biggest potential problems for Apple, and while Apple has many of the characteristics of a good company, it is still unlikely to become a permanent Berkshire company.

(The author is an overseas value investor.) This article has been published in the April 13 issue of Securities Market Weekly, and the article only represents the author's views and does not represent the position of this journal. The individual stocks mentioned in the article are only for analysis and do not make investment advice. ）