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05/17DJAPPLE : Buffett Heirs Bet on Apple -- WSJ
05/16DJBERKSHIRE HATHA : Buffett's Berkshire Takes $1 Billion Position in A..
05/16DJBERKSHIRE HATHA : Buffett's Berkshire Takes $1 Billion Position in A..
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Apple : Buffett Heirs Bet on Apple -- WSJ

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05/17/2016 | 08:50am CEST

Potential successors made $1 billion wager, a rare foray into tech for Berkshire Hathaway

Anupreeta Das 

Warren Buffett's Berkshire Hathaway Inc. disclosed Monday that it had made a $1 billion bet on Apple Inc. stock earlier this year, boosting the iPhone maker's market value by more than $18 billion.

But to the cottage industry that fervently follows the world's most famous investor, it just didn't seem like a move Mr. Buffett would make.

It wasn't, as it turns out. Instead, it was among the largest investments yet by the two former hedge-fund managers that Mr. Buffett brought on board as potential successors to run his company's $129 billion stock portfolio.

Mr. Buffett has long voiced his aversion to investing in technology companies. Four years ago, he specifically ruled out investing in Apple.

But Todd Combs, who joined Berkshire in 2011, and Ted Weschler, who arrived a year later, have shown a willingness to wade into corners of the market that Mr. Buffett won't touch, including the tech sector.

The investment shows the amount of rope Mr. Buffett is willing to give his protégés, as the legendary stock picker, who turns 86 years old in August, prepares Berkshire for a future without him at the helm. In an email Monday, Mr. Buffett didn't say whether Mr. Combs or Mr. Weschler made the call. But he said they each make investment decisions without consulting him first.

The Apple position gives Berkshire a rare sizable stake in a technology company. Its first was Mr. Buffett's $11 billion investment in International Business Machines Corp. Mr. Buffett made that investment in 2011 and has expanded it, most recently early this year. IBM shares have dropped roughly 20% since Berkshire disclosed its stake, as the company tries to turn itself around.

The IBM investment left many Berkshire shareholders, analysts and others scratching their heads. Mr. Buffett had long expressed caution when it comes to tech companies. In his 1996 annual letter to shareholders, he wrote that "many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms...But I would rather be certain of a good result than hopeful of a great one."

His opinion hadn't changed much as of Berkshire's annual shareholder meeting in 2012, where Mr. Buffett said he wouldn't invest in Google Inc. or Apple. "I just don't know how to value them," he said.

That position changed sometime in the first quarter for Berkshire, when Mr. Combs or Mr. Weschler bought the stock. Apple's shares were trading in the mid-90s for much of that time. They closed Monday up 3.7% at $93.88 but are still down nearly 11% this year.

The tech giant's stock has been battered partly because of a slowdown in iPhone sales, as Apple struggles to keep up the strong growth that followed the introduction of its larger-screen smartphones in late 2014. The 2015 successors to those initial big-display models haven't garnered as much enthusiasm from consumers. Last month, Apple reported its first quarterly revenue decline since 2003.

In an interview with The Wall Street Journal at the time, Apple Chief Executive Tim Cook said it was "a challenging quarter," but he dismissed concerns that the company was in decline. He attributed the slump to short-term factors such as the strong dollar, difficult economic conditions and difficult comparisons for iPhone sales. "It's a tough bar to hurdle, but it doesn't change the future," he said. "The future is very bright."

Berkshire's investment managers, each of whom manages around $9 billion, appeared to agree. The Omaha, Neb., conglomerate said in a securities filing it owned 9.81 million shares of Apple as of March 31, valued at roughly $1.07 billion. Those shares are now valued at around $920 million.

Despite Mr. Buffett's concerns about technology, they are buying into a company with many of the traits the billionaire investor likes. Apple arguably has a durable "economic moat" -- or competitive advantage -- in its more than one billion devices in active use and constellation of services like iTunes and the App Store that keep users tied to its devices. It also has a predictable cash flow, and the share-price plunge likely presented a buying opportunity.

On the other hand, Apple, like all technology companies, faces the risk that a competitor with a more compelling product could arise out of nowhere and reshape the industry -- as Apple did over the past decade, devastating once powerful companies like Motorola and Nokia.

"It appears to be a low-risk investment with considerable upside potential...however, I do not think this is an investment that Buffett would make," said David Kass, a Berkshire shareholder and finance professor at the University of Maryland business school. "Todd Combs and/or Ted Weschler...perhaps have a better understanding of the competitive advantages Apple possesses vis a vis the technological challenges it might face in the years ahead."

Berkshire's investment in Apple -- the firm's only new position taken in the quarter -- follows the exits of well-known investors Carl Icahn and David Tepper. Mr. Icahn said last month that he had sold his big stake, telling CNBC at the time that Apple is a great company but no longer a "no-brainer" as an investment choice. He said he worried about the company's ability to succeed in China.

Mr. Icahn made his initial investment, reported to be worth about $1.5 billion, in 2013. He subsequently bought more shares and called for the company to boost its stock buybacks.

Mr. Tepper's Appaloosa Management LP disclosed his sale in a securities filing Friday.

Mr. Combs received an endorsement of his stock-picking skills when Mr. Buffett closed a deal to buy aerospace company Precision Castparts Corp. for $32 billion earlier this year. Mr. Combs began buying shares of Precision in 2012, a year after he joined Berkshire, but Mr. Buffett hadn't followed the company closely until last year.

Although Mr. Combs didn't suggest the deal to his boss, many Berkshire shareholders were reassured that the investment managers were picking stocks that Mr. Buffett approved of. The two men are part of a succession plan that Mr. Buffett has put in place at Berkshire, where his roles as chief executive, chairman and investment manager will be split into three. Mr. Buffett has said his son, Howard Buffett, will be Berkshire's nonexecutive chairman. He hasn't revealed who will replace him as CEO and oversee the conglomerate's giant insurance, industrial, utility and other operations.

Berkshire's two stock pickers, along with Mr. Buffett's financial assistant Tracy Britt Cool -- he calls them the "three T's" -- are closely involved with various aspects of Berkshire's operations. Both Mr. Combs and Mr. Weschler have worked on deals for the conglomerate, for no extra money, as Mr. Buffett likes to say. Mr. Weschler flew to Germany several times in 2015 to negotiate Berkshire's deal to buy motorcycle gear maker Detlev Louis Motorradvertriebs GmbH.

The two managers also jointly bought DirecTV stock before it was acquired by AT&T Inc. in 2015, having built up a position worth nearly $3 billion to become the satellite company's second-largest shareholder. Berkshire made a tidy profit from the deal, given that they had bought DirecTV shares for much cheaper than what AT&T paid for them.

Mr. Buffett has said that the big, multibillion-dollar stock holdings are his picks, whereas his two investment managers typically buy smaller positions of a few hundred million dollars. Among picks thought to be theirs are companies such as Mastercard Inc., Visa Inc. as well as tech companies like data-analytics firm Verisk Analytics Inc. and Verisign Inc., an Internet domain name provider.

"Hiring these two was one of my best moves," Mr. Buffett said in his latest annual letter.

--Lauren Pollock and Erik Holm contributed to this article.

Corrections & Amplifications: Berkshire exchanged most of its position in Procter & Gamble in the quarter to buy Duracell. An earlier version of this article incorrectly stated the firm sold off the shares. (May 16)

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