Beating Buffett at His Own Game

“Buy and hold becomes mantra at the end of a bull market.

“Buy and hold becomes anathema at the end of a bear market.” – Michael Burry

When it was revealed that Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) was buying Apple (NASDAQ:AAPL), the market jumped to attention. Here was the Oracle of Omaha, who had famously stayed away from tech stocks (excluding his disastrous bet on IBM [IBM]), making a multibillion-dollar bet on a consumer electrics firm.

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Berkshire's initial stake in Apple, built in the first quarter of 2016, totaled 9.8 million shares. This was just the beginning for the investor. By the second quarter, Berkshire had bought an additional 5.42 million shares and by the end of 2016, Berkshire's stake in Apple had swelled to about 61.2 million shares. Then Berkshire went all in. Berkshire doubled its stake in Apple in the first quarter. Today Berkshire owns about 130 million Apple shares, giving it a 2.5% stake in the device maker.

According to Buffett, the reason he decided to load up on Apple stock is because its products have become mainstays of people's lives.

“Apple strikes me as having quite a sticky product and an enormously useful product to people that use it, not that I do,” Buffett told CNBC of Berkshire’s move. "The degree to which people's lives center around the product is huge,” he continued.

In many ways, Buffett was late to the Apple party. One highly skilled value investor saw the company’s potential decades earlier, and he even called it “a Buffettlike stock.”

Burry on Apple's potential

Dr. Michael Burry is one of the greatest value investors of the past few decades. One of the first hedge fund managers to spot the risks in the subprime housing market he spent years looking under rocks to find the market’s hidden gems, with enormous success.

At the beginning of his career, when he was still a relative amateur, before opening the hedge fund Scion Capital, Burry discussed his ideas online, and it’s there where he first touted the Apple idea.

“BTW, really, no one is crediting Apple, but to me it has the markings of a value stock and potential Buffettlike stock. A real cash machine of late, trading at a midsingle-digit multiple of cash flow, with a great recovery in terms of operating efficiency. A great brand name with proprietary advantages and mindshare. Subtract out the cash and it was recently trading at about 10 times earnings. A good holding for an 8-year-old. Buy her a blueberry iMac and give her some stock. I bought it as a long-term holding, but it’s run up too. This problem of ultraquick 30% gains despite Buffettesque intent is vexing but not unpleasant.” – Burry writing on the Silicon Investor forums

Burry saw Apple as a value stock in 1999 with any future growth being essentially thrown in for free (despite the mania of the dot-com bubble). The way Burry saw it, the company was being unfairly treated by the market. It had a strong management team, product line and branding, but its shares appeared to ignore all of this.

“Re: Apple, boy, everyone is living in the past on this one. Management is now great. The product is now very good, but even more importantly the marketing is now great. The 'win rate' for new PC buyers here and especially Japan has gone through the roof. And there’s a future dividend that comes with that. It wasn’t $15 just a few months ago. In fact, now it has $15 in cash generated primarily from operations. It’s been bouncing between the mid 40s and low 30s for many months, and is now right where it’s been since 1988 (for a reason – every time it gets to this level people sell), except for the dip to the teens when everyone misjudged the power of the brand. This successful emergence from trial by fire is new information about the durability of the brand, and successful investors it seems to me should be able to absorb it quickly rather than belatedly.” – Burry writing on the Silicon Investor forums

It’s interesting how Burry concentrates on Apple’s branding and management, two points for which Buffett is famous. This time around, though, Burry is first to spot the potential. It took Buffett nearly two decades to realize the same.

Disclosure: The author owns no stock mentioned.

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