Apple: Buffett’s Greatest Trade? | The Acquirer's Multiple®

During their recent episode, Taylor, Carlisle, and Alex Morris discussed Apple: Buffett’s Greatest Trade? Here’s an excerpt from the episode:

Alex: Yeah. I think the kicker on top of that too is to your point, it was only a handful of years after IBM, which was I think it was like a $12-billion-dollar investment, if I remember correctly. And it wasn’t a terrible investment in terms of just the pure P&L. Maybe on an opportunity cost basis, it was, but it wasn’t too long after, he had strayed into– I mean again, they’ve never explicitly said this, but he’d strayed into an area that people thought they basically wouldn’t invest in. So, to then turn around and to make the Apple investment is very interesting.

I think the other point you said on capital returns, I think is also another really interesting part of how Warren thinks about what to invest in and where that question of business quality is then impacted by some level of certainty on the combination of price and capital allocation. And that is a hugely important thing. Especially obviously when you don’t control the companies where you having some clarity on that part of the equation can it makes something that’s closer to just a bond basically.

You just have so much more clarity on what the cash flows are going to print out as versus what happens at most public companies where then if it is low quality, you’ve got a real problem on your hands even if you pay a low price and if you’re stuck holding it for long enough. So, I think that part of it shines too as he thinks about what certainty is. There’s kind of these two components of Coca Cola type business quality and then this price and capital returns component of quality.

Jake: And kind of the invert of that they talked about is that it was a thought experiment from Ben Graham that was called like the Frozen Corporation. And the idea was you have this company that is earning whatever amount and it’s a good earning, but it will, by design, by law, by whatever, internally, it will never return any capital to you. So, no dividends, no buybacks ever. What would you pay for that company? And it’s an interesting thought experiment when you look around at most of the companies that have never– And I mean Berkshire’s in this camp, they’ve done some buybacks, a decent amount actually in the last decade, but they’ve never done a dividend except for like 1965 or something when Warren was in the bathroom.

But yeah, to ask yourself, like, if this company were to never return capital to shareholders, what does it really worth? And if you’re going off of that a company is worth, the intrinsic value is the discounted cash flow of whatever it will produce and return to shareholders over its lifetime, which is sort of the structural or the method that everyone is using, really, at the end of the day then you’re kind of playing a greater fool game otherwise, like someone will pay me more for this. It has nothing to do with what it’s actually going to return. It’s will someone pay me more for this ticket that I know will never actually return anything.

Alex: I think even like taking that idea to now, I think it’s a really interesting example that we’re seeing in the mega cap tech space that speaks to this idea of very significant changes in the capex profile, potentially not the wrong decision depending on if you want to play the game. And that’s obviously a very important part of this question, whether or not any given company that space wants to play whatever version of the game there is. But if you do want to play, spending may be a very important requirement and that certainly introduces a different type of risk that obviously also impacts the standing of the business quality overall of that company. Not playing the game could potentially be a very bad decision depending on what the game is and how it all plays out.

So, it makes me think about– It’s just a really timely example of thinking of what change means in an industry or to a business and how he would then probably tie that back to something like what is the capital allocation strategy? What is the distributions back to the owners look like? What is the actual risk here? And it can be pretty extreme when things are changing, which could mean opportunity for somebody who truly capitalizes on it, or it could mean a lot of value destroyed along the way.

Jake: It’s not obvious like, “Oh, don’t invest in the future and only do buybacks,” because then you end up in a Boeing or Sears situation, right?

Alex: Yes.

Jake: That’s not the obvious answer either. It’s not that easy to untangle really.

Tobias: It’s only answerable.

Jake: After the fact.

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