When you understand that stocks are not just prices on a chart but businesses, investing gets much easier. You take your eyes off solely viewing price undulations and focus more on the nuts and bolts of the business driving the share price.
One business with such extraordinary attributes that Warren Buffett bet over 43% of his holdings in it is Apple. But why was he willing to bet SO much? After all, it defies all advice from financial advisors to diversify broadly to put so many eggs in a single basket.
- Understanding stocks as businesses makes investing easier, as it allows you to focus on the drivers of share price more so than ticks on a chart.
- The reason Buffett bet so heavily on Apple is because of a combination of powerful business factors that make smartphones increasingly indispensable to daily life.
- Apple’s wide moat is unlikely to be disrupted until more advanced technologies, such as chipped human brain synchronized to AI, are adopted.
5 Reasons Why Buffett Bet So Big On Apple
- Phones No Longer Optional: Ask yourself what you can do these days without your phone. That will help to inform the value proposition for Apple. As you explore the question you will discover innumerable parts of daily life that had been solely offline experiences are being digitized. Reading menus at a restaurant is transitioning to viewing QR codes and pulling up the menu on your phone. Checking in for a flight at the ticket counter is transitioning to checking in via an airline app on your mobile device. Logging into a bank account online increasingly requires two-factor authentication with a text to a smartphone. Now extrapolate to the millions of other use-cases. And quickly you will see how smartphone are increasingly indispensable.
- Customer Loyalty: So you need a phone, which one do you choose? You essentially have two choices: Android operating systems and Apple iOS. If you like the flexibility of customizing settings, Android is superior. But consumers have spoken in the first world with their wallets, and decided they like the simplicity of Apple, which holds the dominant market share by revenues. And they’re not switching any time soon.
- Pricing Power: So, phones are intrinsic to daily life and customers are loyal to iPhones. What does that boil down to? It translates to pricing power for Apple. It was unfathomable to imagine a phone costing $1,500 a decade ago. Now consumers barely blink an eye when it’s time to upgrade. One of the reasons Buffett bet so heavily on Apple is he thinks the company has enormous pricing power still. To know what he means, just ask yourself how much would someone have to pay you to give up your smartphone? Would you give it up for $1,000, $2,000, $5,000? Soon, you’ll see how much consumer surplus Apple can still extract over the long-term.
- App Ecosystem: When Apple was developing its phone, a debate broke out between Steve Jobs and his lieutenants. Jobs thought Apple could build and develop applications. His top brass thought it best to create a way for others to develop applications, and Apple should take a cut of their earnings. And so the App Store was born. That monumental decision unleashed the creativity of developers and entrepreneurs around the world. As more apps get built on the iPhone, the friction to any user giving up their phone grows with time.
- Disruptive Technology: What technology can disrupt Apple now? Any studies of screen time reveals iPhone users are addicted to their phones en masse. Can anything disrupt the phone? Arguably a chipped human brain that is synchronized to AI will be more powerful. It seemed preposterous to consider such a thing a decade ago. Now, Elon Musk, has created Neuralink to do just that. Bard and OpenAI have built the artificial intelligence software. But these are all still in their infancy stages. Until they mature, and are adopted by people, the odds of Apple being disrupted are extremely small. That by definition is a wide moat company and why Buffett was so comfortable betting so much.