June 20, 2024
Stock Market

This is Warren Buffett’s biggest stock investment. Should I buy its shares too?


Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

To many, Warren Buffett is the world’s greatest investor. And for good reason. Despite starting with a relatively modest sum, he’s managed to double the stock market average return since 1965, creating one of the most valuable companies in the world today – Berkshire Hathaway.

Berkshire currently has a market capitalisation close to $900bn. But its portfolio managed by Buffett has an estimated worth of $332bn. Compared to the $105,000 he started with in 1956, his returns have been phenomenal. And despite the scale of the assets under management, Buffett continues to deliver double-digit returns.

But most of this performance can be isolated to just one company in his portfolio. As his biggest holding, Apple (NASDAQ:AAPL) represents almost 41% of the portfolio. And when combined with the next four largest investments, the result is that just five companies occupy 76.3% of Berkshire’s investment assets.

Needless to say, that’s a very concentrated portfolio and goes against the advice of diversification. So, should investors be concentrating their portfolios in just a handful of companies like Buffett? And is Apple worth buying in 2024? Let’s take a look.

The role of diversification

By owning a wide range of businesses operating in different industries and geographies, a portfolio is exposed to less company-specific risk. That means, should one firm fail to live up to expectations, the others that are more successful can offset the losses and keep the portfolio in the black.

However, diversification has its downsides. The more thinly capital is spread, the smaller the benefit from a successful single position. That means if a stock were to double in price, the impact on total portfolio returns for the year would be much smaller for a portfolio with 20 stocks versus one with just five.

So yes, concentration does lead to greater returns, but at the cost of added risk. Don’t forget the more concentrated a portfolio, the more damage is done if a position starts to tumble. Given his experience and expertise, Buffett is comfortable having so much wealth tied up in Apple. But for new and conservative investors, concentration is likely a bad fit in terms of portfolio strategy.

Is Apple a buy in 2024?

At a market capitalisation of almost $3trn, Apple is one of the biggest companies globally. But despite the stock’s upward trajectory over the last 12 months, the iPhone maker is actually tackling a few challenges. Most notable is the firm’s flat revenue growth.

Earnings have been on the rise through margin expansion, but there are ultimately limits as to how far management can take this. As such, restoring top-line growth is critical to maintaining its current valuation. After all, at a price-to-earnings (P/E) ratio of 30, the stock is hardly cheap.

All eyes are on the upcoming launch of its iPhone 16 this September to see whether it will be able to reignite the growth engine. And investors are eagerly awaiting new project announcements, especially in AI, at Apple’s Worldwide Developer Conference next week.

With all that said, is now a good time to buy its shares? I’m not convinced. The valuation appears to be driven by expectations more than fundamentals. And one thing that Warren Buffett has always aimed to avoid is overpaying for a business, even one as prominent and successful as Apple.



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