What if Buffett never bought Apple?
How to win at picking stocks
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As always, this year’s Berkshire Hathaway shareholder letter is a joy to read. Buffett continues to share his folksy wisdom and is remarkably open at sharing his mistakes. He also highlights how he never looks at where the candidate has gone to school when picking a CEO and that their investment horizon continues to be in decades.
But our favorite is how a single winner can make all the difference:
Our experience is that a single winning decision can make a breathtaking difference over time. Mistakes fade away; winners can forever blossom
Nowhere is this more true than in investing. You can make 100 mistakes and still win by getting just one thing right. In fact, most investors are famous for the one right trade they made.
Michael Burry (of “The Big Short” fame) is still famous for calling the housing market crash even after getting almost every other prediction wrong.
Jason Calacanis’s entire persona revolves around the fact that he got in on Uber's angel round.
Robert Kiyosaki wrote Rich Dad Poor Dad in 1997 and now predicts a crash every other week (yet somehow, people still listen to him).
We can go on, but you get the gist. While Buffett can never be bucketed into this list (he has been outperforming the S&P 500 from before the S&P 500 was created), Berkshire’s last 10-year (& 20-year) performance has been remarkably close to the S&P 500.
$10K invested in Berkshire in 2016 would now be worth $35K vs $34K in the S&P 500. As expected, Berkshire’s performance is highly correlated with the market (given Berkshire’s extensive U.S. operations) and has exceptional downside protection.
Given that Berkshire has edged out the market over the past decade, you might expect that most of their investments outperformed the market. After all, 80% of fund managers underperform over a 10-year horizon.
Let’s take a look at the major moves made by Buffett in the last decade or so, and how they have performed1:
Kraft Heinz — Berkshire got ~25% ownership of Kraft Heinz in 2015 after Kraft Foods merged with H.J. Heinz. But over the next 5 years, the stock fell 50% and had a $15 billion write-down in 2019. Buffett himself admitted, “We overpaid for Kraft,” calling the investment a mistake.
Precision Castparts — In 2016, Berkshire paid $32 billion to acquire Precision Castparts Corp. (PCC), a manufacturer of aerospace and industrial components. Just 4 years later, Buffett conceded that he had paid too much for the company. Berkshire had to take a $10 billion goodwill write-down in 2020 due to plunging aerospace demand.
Airline Stocks — Buffett surprised everyone in 2016 by taking a stake in four major U.S. airlines, a sector he once called a “deathtrap” for investors. He spent an estimated $8 billion by 2017 to become the top shareholder in Delta, United, American, and Southwest Airlines. Once again, airlines performed terribly, and Buffett exited these positions at the beginning of the 2020 pandemic, taking a loss of approximately $4 billion.
Apple — In 2016, Todd Combs (CEO of GEICO) finally convinced Buffett to start buying Apple. Buffett quickly understood how strong the brand was and how well it locked customers into its ecosystem. Berkshire spent ~$31 billion (less than what they paid for PCC) in the next 2 years, acquiring ~5% of Apple. Apple went on a tear and rose by more than 700% in the next 7 years. By the end of 2023, just this one position had grown to over $175 billion, representing an unrealized gain of $140 billion.
Here’s how the returns of Berkshire would have looked with and without Apple from 2016 to 2023 (removed 2024 since Berkshire started selling Apple at the beginning of last year)
With Apple — Berkshire: 174% | S&P 500: 168%
Without Apple — Berkshire: 142% | S&P 500: 168%2
Here’s another stat: Berkshire would have significantly lagged the market over the last 20 years without Apple (2004 to 2023)
With Apple — Berkshire: 542% | S&P 500: 537%
Without Apple — Berkshire: 442% | S&P 500: 537%
The only difference for one of the world’s largest corporations owning 70+ companies and having 50+ stock positions outperforming or underperforming the market finally came down to the one stock pick they made 10 years back.
If arguably the world’s smartest investor got 3 out of the 4 major investment decisions wrong in the past decade, how can a normal investor pick stocks and beat the market?
Just hold the goddamn stock. — Charlie Munger
One of our guilty pleasures is following along with the Palantir stock updates from Tom Nash. While it’s certainly way outside of our risk tolerance, he has been bullish on the stock since 2020 — starting with a deep-dive where he highlighted Palantir as a uniquely positioned company with no direct comparables.
From its high in 2021, Palantir dropped 82% before bouncing back by a mind-bending 1,575%! It’s again down 30% from its all-time highs — all through which Tom held the stock.
If you think that only small companies behave this irrationally, consider this:
Meta (formerly Facebook) was the fifth-largest company in the S&P 500 going into the pandemic. During the pandemic, they unveiled the Metaverse, and the stock went up by 96%. Then, people realized that nobody wanted to sit in a virtual reality room with their coworkers, and the stock went down by 76%. After the extreme drawdown, investors realized once again that, hey, the company is still minting money and is used by literally 3 billion people daily. The stock is now up 635%!
The funny part is that, in between all this, the company went on to double its revenue from $85 billion in 2020 to $165 billion in 2025. You will never see this stat in the news - it’s always alarmist-sounding narratives that the stock is down 15% from its ATH or that the company missed some arbitrary earnings estimate. But tracking the fundamentals is way more important than paying attention to the stock price (we’ve written about this in detail).
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Why holding is the only way to win:
It's not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong. — George Soros
If you are someone who picks stocks, the only way to win long-term is to have deep conviction and a long time-horizon. This is not just our opinion — it’s because the stock market is a non-ergodic system.
Even though the U.S. stock market increased shareholder wealth by $47.4 trillion over the last 100-odd years, only the top 1,000 stocks (~4% of the base of 26,000+ stocks) accounted for all the wealth creation. The most common one-decade buy-and-hold return was -100%.
John Rekenthaler had similar findings. When he checked the performance of the 5,000 biggest U.S. stocks from 2011 to 2020 (a decade of almost uninterrupted bull market), he found that
42% of companies went up (Only ~20% beat the index)
36% of companies lost value
22% disappeared from existence (acquired or delisted)!
Over the long run, the probability that you’ll pick the “right” company that will beat the market is less than 10%. But if you do find a winner, it’s much better to hold on than to sell early.
In 1935, Grace Groner purchased three $60 shares in Abbott Laboratories, where she also worked as a secretary for 43 years. After her death in 2010, it was revealed that this initial investment had ballooned to $7 million — which she left to charity.
While it’s easy to see a stock chart and say that we would have held through it all, the temptation to sell is real. A more realistic way to hold long-term is to recover the cost basis and let the balance ride.
For example, let’s say you bought into the Tesla IPO for $1K in 2010. By 2013, your investment would have doubled in value. Instead of selling the entire thing and realizing the profit, you sell half to recover your original investment and then consider the other half as house money. Even if it goes to zero, you don’t have a massive regret or portfolio impact as you have already recovered the original investment. If you had done this, the other $1K would have grown to over $184K now!
Even though this might not be the optimal strategy, it’s psychologically much more palatable. Here is Aswath Damodaran, who is implementing a similar strategy for his Nvidia gains.
I would be lying if I said that selling one of my biggest winners is easy, especially since there is a plausible pathway, albeit a low-probability one, that the company will be able to deliver solid returns, at current prices.
I chose a path that splits the difference, selling half of my holdings and cashing in on my profits, and holding on to the other half, more for the optionality (that the company will find other new markets to enter in the next decade).
The value purists can argue, with justification, that I am acting inconsistently, given my value philosophy, but I am pragmatist, not a purist, and this works for me.
If it’s good enough for the dean of valuation, it should be good enough for us.
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If you're wondering why we overlooked the Japanese investments, it's because they now make up less than 3% of Berkshire's market value.
There would be a lot of ways to calculate this. What we did was to remove just the unrealised gains ($140 bn) from the market cap ($777 bn as of Dec 2023) and then adjust the stock price to calculate the return. This assumes that instead of investing in Apple, Buffett held it in cash/T-Bill (entirely possible given Buffett’s preference to hold cash waiting for the right opportunity). We would also argue that this is a conservative estimate in favor of Berkshire as not having Apple in their portfolio would have significantly affected their overall valuation as well, making the performance even weaker.
Very informative. Thank you. This is the conclusion I've come through experience too: you keep investing until a big opportunity comes a long. When that happens you allocate 10% or higher of your portfolio and let it ride.
Great article.