Warren Buffett’s Apple trade exposes Berkshire’s dilemma

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What is the next great investment idea? And what are the chances that Warren Buffett will be the person to identify it? Wall Street likes his odds. Shares in the class B of Berkshire Hathaway are up 25 per cent so far in 2024. And the rally comes as Buffett has been rapidly paring back his blockbuster win in Apple stock.

On Saturday, Berkshire Hathaway reported its third-quarter results, most notably that its cash and marketable securities balance had swelled to $325bn. A big chunk of that has come from share sales of Apple whose value for Berkshire now stands at $70bn, down from a peak of $178bn. Berkshire invested initially in Apple in 2016 when its share price was around $25 a share. Today Apple trades above $200.

Berkshire’s total book value through the third quarter was $631bn, while its public equity market capitalisation is just shy of $1tn. That premium to net asset value reflects a vote of confidence from shareholders that Buffett, at 94, has another similar masterstroke in him.

Buffett for now, however, is increasingly content to clip US Treasury coupons earning a few percentage points, risk free, with no dividends or real buybacks for Berkshire shareholders. 

It comes as other big pools of capital — alternative asset managers as well as BlackRock — are pouring funds into all types of plain and exotic private credit as well as long-tailed infrastructure and data centre deals. Blackstone, for example, has deployed $123bn in the past 12 months mostly away from either public or even private equity.

To be sure, Berkshire’s property and casualty insurance business carries out all sorts of sophisticated trading and hedging activities. But the investment group is best known for largely buying public, large-cap equities as well as mega operating business platforms such as power utilities and railroads. In the absence of a financial markets crisis where Buffett could play white knight to handsome reward, there is a question in calm markets if he needs to choose less vanilla securities.

The sheer size of Berkshire now makes it hard to find single investments that can move the needle. Its securities portfolio of more than $300bn has fewer than 30 stocks and the next Apple probably needs to be an up-and-coming Big Tech luminary. Buffett’s Apple bonanza helped obscure the dearth of juicy opportunities for Berkshire. That dilemma is now back on the table.

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