Value vs. Growth: The Untold Story of Berkshire’s Apple Investment
In the ever-churning world of financial news, headlines can paint a confusing picture. The investment world thrives on narratives, captivating stories that shape our perception and, sometimes, our decisions. One such narrative is the supposed incongruity of Warren Buffett's "value investing" prowess and Berkshire Hathaway's significant stake in Apple.
This seemingly contradictory tale hinges on two key concepts: Value Investing and Growth Investing. What is a Value Investing you may ask? According to Investopedia,
“Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating… Investors use various metrics to attempt to find the valuation or intrinsic value of a stock.”
Contrast that to Growth Investing, and I will again refer to Investopedia,
“Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
Growth investing is highly attractive to many investors because buying stock in emerging companies can provide impressive returns (as long as the companies are successful). However, such companies are untried, and thus often pose a fairly high risk.
Growth investing may be contrasted with value investing. Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.”
Put simply, Value Investors seek undervalued gems, while Growth Investors chase companies with explosive potential. Apple, the world's largest company by market capitalization, appears to fit neither mould. “Never let the truth get in the way of a good story”, is a quote attributed to Mark Twain, and storytellers love to remind us of this as they know that context is crucial.
Back in 2016, Apple was a different beast. Its valuation, measured by the price-to-earnings ratio, was half of what it is today. This placed it firmly within the realm of value investing at the time. So, was it a growth gamble? Not quite. Berkshire's investment in Apple was a calculated value play based on its then-undervalued state. With time as Berkshire accumulated Apple’s stock, Apple itself grew into the behemoth that is now referred to as, a Mega Cap stock, and one of the famous Magnificent Seven from the latest group of “popular” stocks.
Liz Ann Sonders, from Charles Schwab, , demonstrates how Growth and Value investing as a style, or strategy can go out of whack using the S&P and Russell Indexes. She notes that the S&P and Russell both have Growth and Value Indexes, but they are structured differently and have different rebalancing schedules.
Last December, the S&P Pure Growth Index saw major changes in its composition, resulting in Technology stocks (as a sector) going from being 37% of the Index to 13% of the Index. Energy stocks at the time became the largest weighted sector and Healthcare became the second largest sector. The Energy Sector at the time of the change was up circa 69% year to date, while the three sectors, which the Magnificent Seven are within, namely, Technology, Consumer Discretionary and Communication Services were down 25%, 30% and 36% respectively. That rebalancing meant performance for the S&P Pure Growth had only one of the Magnificent Seven in the portfolio as from December 19th 2022 until about mid December 2023. By defining Growth stocks differently to their peers, the S&P Pure Growth Index had an 8% Total Return in 2023, while their Benchmark had a Total Return of 30% in the same period.
Today, Apple is no longer a Value Stock, because it is not cheap by most valuation metrics relative to the rest of the market. Further to that, Apple's earnings growth has slowed, pushing it out of some "pure growth" categories. However, its position in Berkshire's portfolio remains strong, driven by factors beyond simplistic labels.
The late Charlie Munger’s take on the lesson from Berkshire Hathaway’s investment in Apple,
“What everybody has learned is that everybody needs some significant participation in the 12 companies that do better than everybody else. You need two or three of them, at least. If you have that mindset. Apple was the logical candidate to be on the list of which you’re going to select your companies. It’s not very hard to come up with an idea that it may be OK.”
The dynamic nature of investing styles and the importance of considering the context surrounding individual decisions needs more consideration before jumping to conclusions. Don't be swayed by narratives without critical analysis. Look beyond headlines and delve into the underlying facts and context.
Investment styles are not static. Companies and their valuations evolve, requiring flexibility and nuanced understanding.
Context is king. Decisions made in one economic climate may not translate directly to another.
Thank you for stopping by, and as we bid farewell to 2023 and look forward to 2024, Stay tuned for future explorations into the fascinating world of finance and behaviour of market participants. Wishing you a prosperous New Year!