Warren Buffet’s Portfolio Is 55% Concentrated in Apple. Should You Follow This Strategy, Which Goes Against the Rule of Diversification?
Attempt at an answer.
In the investment world, there's one golden rule: you must diversify your investments to optimize risk.
If you have an equity portfolio, this is even truer.
Given that Warren Buffett is often regarded as an absolute master of investing, even if he still doesn't understand the why of Bitcoin, you'd think he'd apply this golden rule himself.
And yet, Warren Buffett doesn't follow this golden rule at all. Despite all this, his investment success has been disconcerting for decades.
So, what should you do? Should you put all your eggs in one basket like Warren Buffett, at the risk of increasing your risk?
Here's an attempt at an answer.
At the time of writing, the market cap of Berkshire Hathaway, Warren Buffett's investment vehicle, stands at between $870 and $880 billion. This is phenomenal and commands respect.
However, if Warren Buffett followed the basic rules of diversification, none of his investments would exceed 5% of the total value of his investment company.
If Warren Buffett adhered to the basic rules of diversification, adding a slightly higher degree of risk, none of his investments would exceed 10%. And that would already be a very personal interpretation of the basic rule...
The latest news on Berkshire Hathaway's stock portfolio is that Warren Buffett's investment company holds $167 billion worth of Apple shares. This gigantic figure represents 20% of Berkshire Hathaway's total capitalization!
In the last quarter of 2023, Warren Buffett slightly reduced his holdings of Apple shares by 1%. Nevertheless, Warren Buffett still holds 5.9% of Apple's outstanding shares.
Of Berkshire Hathaway's total portfolio, $300 billion is invested in equities, i.e. 35% of the total portfolio. Warren Buffet therefore has 55% of his stock portfolio based on Apple shares alone.
That's right, 55%!
That's a far cry from the 5% or even 10% I mentioned earlier.
So when Apple loses 1%, Warren Buffett loses $1.67 billion. Of course, it also works the other way around when things go up. And in this case, Apple shares are going up. It's going way up!
Since 2019, Apple's share price has risen by +368%. If Warren Buffett were a gambler, you could say he bet everything on the red, and the red has come out every year for the past 5 years.
When asked about this risk Apple represents for Berkshire Hathaway, here's what Warren Buffett says:
“Apple happens to have the best business of any company we own.”
At this level of investment, Warren Buffett had better be convinced, because he's put almost all his apples in one basket. Even if Apple shares are down slightly in 2024, at -4% since January 1, that's nothing compared to the +368% rise since 2018.
In the investment world, everyone is eagerly awaiting Warren Buffett's famous annual letter to Berkshire Hathaway shareholders, to be published on February 24, 2024, to have the words of the Oracle of Omaha.
In addition to his massive position with Apple, Warren Buffett has other very important positions with Coca-Cola and Bank of America.
So, should you act like Warren Buffett with your stock investments?
My answer is simple: No. Not everyone is Warren Buffett.
Not everyone is Warren Buffett. There's only one Warren Buffett.
You don't have the track record that Warren Buffett has built up year after year over the last 50 years. A track record that allows Warren Buffett to make bets that only he can make.
For your part, the best thing to do is stick to the old tried-and-tested recipes. Stick to the rule of diversification. If you don't like it, the best thing to do is invest in Berkshire Hathaway and hope that Warren Buffett continues to live for many years to come!
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