In 2016, Warren Buffett (Trades, Portfolio) started buying shares in Apple (AAPL, Financial) for Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) equity portfolio.
At the time, this was a big deal. Even though the Oracle of Omaha had initiated a significant position in IBM (IBM, Financial) previously, he had always stayed away from the world's technology stocks.
Since then, Berkshire has not only increased its holding of Apple, but the company has also grabbed an investment in the recently-IPO'd cloud computing services provider Snowflake (SNOW, Financial).
Buffett on tech stocks
At the latest Berkshire Hathaway annual meeting held this past weekend, one shareholder wanted to know if Buffett's recent technology deals were a sign of things to come.
The investor noted that many technology stocks are high margin, high return on equity businesses, the sort of businesses Buffett has often said he prefers. Does this mean "high-margin businesses will begin to constitute a larger proportion of Berkshire's investment portfolio over time?" the questioner asked.
Buffett began his response to the question by stating that he had always said a good business does not use a lot of capital and grows very quickly. "Apple and Google (GOOG, Financial) and Microsoft (MSFT, Financial) and Facebook (FB, Financial) are terrific examples of that," he added.
He stated that Apple has just $37 billion in "property, plant and equipment," while Berkshire has more than $170 billion, and Apple is going to "make a lot more money than we do."
He went on to add that he and Charlie Munger (Trades, Portfolio) had known all of these tech giants "were way better" businesses for some time. They found that out with See's Candy, which the duo acquired in 1972. The company does not have and does not require much capital.
"Those are the kinds of businesses, they're the best businesses, but they command the best prices, too. There aren't that many of them, and they don't always stay that way," he said.
The Oracle of Omaha continued added that people getting a return on capital is what "capitalism is all about." Some companies can achieve high returns on capital, and others cannot. Others need to put a lot more money into the pot to earn higher nominal profits.
The CEO of Berkshire highlighted the group's utility business, Berkshire Hathaway Energy. He stated that the division is currently working on a transaction with a return on capital of 9.3%.
"If you look at the return on most American businesses on net tangible assets," Buffett declared, "it's a lot higher than 9.3%, but they aren't utility businesses either."
High return companies
Buffett has always been searching for high return on capital businesses, and we can see that in the major investments he has completed throughout his career. As well as Apple, the likes of American Express (AXP) and Coca-Cola (KO) are both relatively high return businesses.
But it's not just about finding a company with a high return on capital. Almost any company could earn a high return on capital for one or two years if they wanted. The challenge is to find a business that can consistently earn a high return on capital for five, 10, or 20 years.
Finding these companies is far more challenging. It's made even more difficult because there are only a few of them, and most are not appropriately priced. Finding a high-quality business that can earn a high return on capital for 10 years is hard enough without bringing price into the equation. Unfortunately, that only adds another layer of complexity.
It should also be noted that the tech sector has only really taken off in the past 10 to 15 years. Before that, many technology businesses didn't appear to be sustainable enterprises. Indeed, the vast majority of startups in the industry failed. That's one reason why Buffett's portfolio has lacked significant technology exposure in the past. For 80% of his career, technology has been a challenging sector. As a result, it has been easier to look in other areas.
Disclosure: The author owns no share mentioned.
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