Despite multiple reductions, AAPL is still Warren Buffett's largest holding as you can see from the following chart. In this article, I will probe into the wisdom of Warren Buffett on Apple stock. Warren Buffett has made about $100 billion on Apple stock! This makes the iPhone maker one of the billionaire investor's best investments ever!
In an interview with Yahoo finance a few years ago, Buffett was asked about how closely he follows the company given his large take in it. Because many people are concerned with Apple. Apple really has not introduced any new products lately. And Buffett’s answer is always insightful, and let’s hear it first.
So to sum up, the key takeaways from mister Buffett’s wisdom are.
1. If you have to closely follow a company, you should not own it at the first place.
You buy it knowing there is 365 days a year and you are going to own it for 20 years. And you know that things are gonna to be different from day-to-day. You should not buy it at the first place if the day to day stuff is important.
2. Owning a stock for the long term is like owning a farm. Going up there and checking every couple weeks do not help the corn to grow any faster.
3. however, I do care over the years that it is well tended to, and I hope its yields get better.
So the Key Topic For the remainder of this video today are to discuss these following two questions.
Question 1. How to evaluate if the business is well tended to?
Question 2. And if the yields are getting better?
Many investors use ROE (return on equity) of a business as a profit metric. But this can be misleading for companies like AAPL.
For one thing, share equity does not reflect the actual capital employed by Apple. the business has a large amount of cash on its book. Whether holding a large amount of cash is good or bad is a different topic for another day. But as a business accumulates more and more cash, the book value increases and therefore ROE decreases. But this doesn’t mean the business is becoming any less profitable at all. It could just still be the same profitable business that has more and more cash on hand. And in any case, the idle cash sitting on the book is not actually involved in the business operation. And in this case, the use of ROE is misleading because the inclusion of such idle cash distorts the picture of profitability.
Also, for a company like Apple, what make is great is the continuous investment in innovation. Apple's has been spending billions and billions of dollars, year after year to pursue such innovations. The R&D expenses are not a part of share equity but is essential for AAPL in my view.
That is why I suggest you look at ROCE, the return on capital ACTUALLY employed in a business. So what are the capital actually employed for a business like Apple? To estimate the ROCE of businesses like Apple, I consider the following items capital actually employed:
1. Working capital, including payables, receivables, inventory.
These are the capitals required for the daily operation of their businesses.
2. Gross Property, Plant, and Equipment.
These are the capitals required to actually conduct business and manufacture their products.
3. Research and development expenses
With the above, you can see that AAPL’s ROCE is above 100% in recent years, extremely competitive even compared to overachievers like the FANNMG or Mag 7 stocks. It is indeed high-yield farm in Buffett’s words!
For readers interested in more details, the following YouTube video provides more data and specifics:
https://www.youtube.com/watch?v=fyrp2mx6alQ
