Warren Buffett’s Big Apple Buy: So Maybe It’s Okay To Be Overweight ‘FAANG’ Stocks?

&l;p&g;&l;img class=&q;dam-image bloomberg size-large wp-image-41520232&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/41520232/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. Photographer: Christopher Goodney/Bloomberg

&l;a href=&s;http://www.forbes.com/profile/warren-buffett/&s;&g;Warren Buffett&l;/a&g; is on a tear unlike almost anything we&s;ve seen in the &l;em&g;Oracle of Omaha&s;s&l;/em&g; storied investing career. He&s;s now purchased some 240 million shares in Apple, worth around $44 billion dollars. That was the big reveal Buffett offered CNBC&a;rsquo;s Becky Quick ahead of Berkshire&s;s annual shareholder meeting on Saturday. His investing conglomerate added 75 million Apple shares in the first quarter to the 165 million shares it already owned.

There&s;s a litany of reasons Buffett decided to become Apple&s;s second-largest holder. Among them: Apple is the most profitable company in the world. It has an un-levered balance sheet. The users of its pioneering hardware products and services grow every day. The switching costs of changing a smartphone or computer operating system are high. To boot, Apple&s;s turning into a pretty decent dividend stock, yielding nearly 2%. What&s;s not to like? Especially coming from a company that trades at enterprise value of less than 12-times trailing EBITDA. Buffett&s;s made a career&a;mdash;and tens billions of dollars&a;mdash;capitalizing on his common sense. It&s;s getting hard to argue Apple isn&s;t a classic &q;no brainer&q; stock.

No surprise, investors reacted to Buffett&s;s big buy with their own purchases, generating a pop in Apple stock, which rose nearly 4% in Friday trading, putting it in the green for the year. For those who don&s;t feel like buying Apple, there&s;s a far bigger takeaway: Perhaps Buffett&s;s big Apple buy is indication it&s;s perfectly fine to be overweight red-hot tech stocks like Facebook, Amazon, Apple, Google and Netflix.

My 401k money is in an S&a;amp;P 500 Index fund. However, the scolds of passive investing say this is folly. Index investors like me, they argue, are blindly and unwittingly buying tech stocks at ever higher prices, making their portfolios ever more perilously exposed to the &a;ldquo;FAANGs.&a;rdquo;

And yet, if one were to think of Berkshire Hathaway as a zero-cost fund, it&s;s clear Buffett is making the very same move as my index fund.

With over $30 billion plowed into Apple, the iPhone-maker is now effectively an 8% weight of Berkshire&s;s overall $350 billion in book value. Prior to Apple, Berkshire was underexposed to technology stocks, and Buffett and his investing lieutenant Charlie Munger have said at recent investor meetings they &q;missed&q; some of today&s;s blue-chip tech stocks like Amazon and Google. Perhaps, they&s;re playing catch-up with Apple, the cheapest among the FAANGS.

Interestingly, after loading up on Apple, Berkshire&s;s exposure now looks surprisingly similar to&a;nbsp;an index fund.


Berkshire&s;s 8% Apple weight compares to the 10%+ weight the S&a;amp;P 500 currently holds in the FANGs. Put differently, with his Apple buy, Buffett is&a;nbsp;building a portfolio weight that&s;s similar to the ones&a;nbsp;passive investors already own. No surprise, Buffett is a big fan of passive investing. He calls Vanguard&s;s&a;nbsp;&l;a href=&s;http://www.forbes.com/profile/jack-bogle/&s;&g;Jack Bogle&l;/a&g;, the pioneer of the many-trillion-dollar passive revolution, a &q;hero.&q;

Here&s;s what he said in Berkshire&s;s 2016 shareholder letter:

&l;/p&g;&l;blockquote&g;If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing&a;mdash;or, as in our bet, less than nothing&a;mdash;of added value.

In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.&l;/blockquote&g;

&l;strong&g;Bottom Line:&l;/strong&g; Next time the scolds of passive investing warn about your blind overexposure to Facebook, Amazon, Apple, Google and Netflix, take it with a grain of salt. Your S&a;amp;P 500 Index fund is now about as exposed to big tech as Berkshire.

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