After four months of solid economic data, low inflation and unemployment, historically strong earnings reports and an all-around “goldilocks” economy, the broad markets remained in the doldrums, basically unchanged on the year. Volatility has reigned as investors struggled to decide which direction stocks would go next.
All of that changed when Warren Buffett spoke on Thursday.
Speaking to the media prior to the Berkshire Hathaway annual shareholder’s meeting, Buffett disclosed that he had purchased an additional 75 million shares of Apple (AAPL - Free Report) in the in the first quarter of 2018, adding to the 165 million shares that Berkshire already held. Their total position is now valued at more than $43 billion.
Employing his traditional folksy-genius logic, Buffett outlined his plan to hold Apple for the long term – 10 or 20 years – and implored investors to ignore noisy data like the number of iPhones sold in any given quarter and focus on the fact that Apple sells products that have become ubiquitous.
The “Oracle of Omaha” laid out a convincing bull case for the world’s biggest company, pointing out their $60 billion in annual earnings is almost twice as much as the second most profitable company in the U.S, pointing out “It’s a wide, wide gap. It’s an amazing business.”
Apple stock, languishing of late due to less than rosy predictions about sales growth in phones, reported a big earnings beat last week, raised guidance, raised the dividend and announced an additional $100M in stock buybacks.
Buffett pointed out the simple math behind the aggressive buybacks. “We own about 5%,” he said “But I know I don’t have to do a thing and probably in a couple years we’ll own 6% without laying out another dollar.” He went on to say that not only did he not care about short term price performance, but that he would actually prefer for the stock to trade lower so that the buybacks would pack a bigger punch. That’s the thinking of a true long-term investor.
Already buoyed by the strong earnings announcement, Apple stock rallied to new all-time highs and pulled the markets along with it. Coupled with great Q1 earnings at Facebook (FB), Amazon (AMZN - Free Report) , Alphabet and Microsoft (MSFT - Free Report) , the indexes shrugged off their recent malaise and resumed their bull run, with the S&P 500 gaining 3% in the last two trading sessions and the Nasdaq 100 gaining more than 4%.
With a market Capitalization of $912B, Apple represents more than 12% of the Nasdaq 100 index and the recent rally – thanks to the popularity of indexed investing – has pulled the entire market with it.
In uncertain times, all investors can learn a valuable lesson from Buffett, one of the greatest investors of all time, do your homework and treat short term dips in the companies you want to own as buying opportunities.
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