One of Warren Buffett’s most important principles is that investing doesn’t take an unusually high IQ. In other words, he believes in keeping things simple when it comes to investments.
I’ve been applying this principle to my own portfolio. With share prices lower than they were at the start of 2022, I’m keeping things simple in 2023.
As a result, I’ve been buying shares in Apple (NASDAQ:AAPL). With the stock down around 28% over the last year, I really haven’t felt the need to venture into anything more creative.
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Apple shares
Apple is a stock that Buffett is a huge fan of. It’s the largest investment in the Berkshire Hathaway portfolio.
It’s not difficult to see why. The company has a great business model and generates significant amounts of cash.
Apple’s business basically consists of two parts. There’s the hardware division and there’s the service operations.
The products division has lower margins but brings in around 80% of the company’s revenue. The services business brings in less revenue but has much higher margins.
Together, these make a business that generates $119.5bn using just $42bn in fixed assets. Its ecosystem is also difficult to switch away from, generating significant recurring revenues.
Any investment carries risk and Apple is no exception. The company’s exposure to China in terms of its manufacturing and its customer base is something that I’m going to keep a close eye on.
To my mind, though, the business is clearly extremely strong and — with $49bn in net cash — its balance sheet looks sound to me. Furthermore, I think it’s trading at a bargain price at the moment.
Valuation
In my view, Apple stock trades at a good price relative to the cash the business generates. The company has a total stock market value of $2.1trn and generates $111bn in free cash per year.
Factoring in the company’s cash and debt, that’s an investment return of around 4.7%. Is that any good?
The answer depends on what returns are on offer elsewhere. Especially, it depends on what return I could get from buying a bond that will offer a return for the next decade.
Right now, the return on a UK government bond expiring after 10 years is about 3.5%. Compared to that, I think a 4.7% return from Apple shares is pretty attractive.
Of course, there’s a decent chance that bond yields could go higher over the next few years. Inflation in the UK is still rising, so I expect interest rates to go up further as a result.
But I expect Apple’s free cash flow to rise over time as well. Furthermore, the company is aggressively buying back shares, which should amplify the effect of this.
That’s why I’ve been buying the stock for my portfolio. It has reached a level where I expect the investment return to outperform bonds over the long term.
A stock I’m buying
I’m sticking to Warren Buffett’s approach and looking to avoid overcomplicating things in 2023. With stocks down, I’m expecting more opportunities to buy shares in quality companies at decent prices.
Right now, that means buying shares in Apple. I’ve been adding to my investment in the company this week and I’m planning to keep doing so.
