Warren Appleseed

Apple falls far from Buffett's investing tree

Apple is a stock that falls far from Berkshire Hathaway's value-investing tree. The conglomerate run by Warren Buffett disclosed on Monday that it had recently bought a $1.1-billion stake in the iPhone maker. It's a departure from his general aversion to tech. A limping investment in IBM also might have been expected to reinforce that view.

Buffett relishes companies with great brands trading at relatively cheap valuations. In that regard, Apple fits the bill. It has legions of happy customers and, adjusted for its $150-billion cash stockpile, the company trades at less than eight times estimated earnings for the year to September 16.

The Oracle of Omaha's philosophy is rooted in grabbing opportunities at a discount when other investors flee. Berkshire bought Apple just as the tech titan was about to report its first decline in revenue in 13 years. The dip in iPhone sales may be temporary and the price of entry attractive enough to withstand sales and profit that merely trudge along.

As Buffett noted in 1999 when the tech bubble was inflating, the important thing is "determining the competitive advantage of any given company and, above all, the durability of that advantage." Tech brands tend not to have the same lasting value as, say, soda or banks. Wang Laboratories, anyone? Smaller upstarts in the sector often have greater power to displace entrenched goliaths, and faster.

Berkshire's investment in IBM is a good example. Buffett initiated the position in 2011 at an average price of about $167 a share, and has bought more since. The valuation looked cheap, its services business steady and the brand blue-chip. IBM, however, has yet to replace fully declining hardware and consulting revenue with sales of cloud-based software and artificial intelligence. The shares now trade at about $150 apiece.

The Apple stake is far smaller. And, according to The Wall Street Journal, it was not Buffett rather one of his lieutenants who took a shine to Apple. Even so, despite the company's powerful position, in many ways it is a bet on the next big thing - perhaps even in a driverless car. It suggests that Berkshire may yet grow into a different sort of investment shop than the man who gave birth to it.