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Since Warren Buffett bought Apple (NASDAQ:AAPL) in 2016, the stock went from around $23 to $242. That's a 952% return not including dividends.
Much of Buffett's success comes down to buying quality stocks at good prices. But investors expecting similar results often overlook a reason that I think could be even more important.
Tenure
Charlie Munger: Buffett's former right-hand man at Berkshire Hathaway – used to say that investment returns do not come from buying or selling. They come from the holding company.
Berkshire's investment in Apple is an example of this. Since 2016, the stock has looked expensive on several occasions, but selling it at any of those times would have been a mistake.
For example, the stock price hit an all-time high of $124 in August 2020. But an investor who sold then would have missed out on about half of the gains made by holding it until today.
Likewise, the stock looked expensive in November 2020 with a price-to-earnings (P/E) multiple of 40. But the stock price has more than doubled since then, rewarding investors who didn't sell.
There is a clear lesson here for investors. Even when a stock looks expensive, it may have to go further if the underlying business can continue to grow.
This is why the ability to avoid selling can be so important to overall investment performance. Despite this, Buffett has been aggressively reducing Berkshire's stake in Apple this year.
When to sell?
Buffett holding Apple shares even when they looked expensive has generated returns that would have otherwise been lost. But this does not mean that selling is always a mistake.
In any company, its shares are likely to be trading at a price higher than the value of the underlying business. And in that situation, shareholders should think carefully.
Is this the case with Apple? It could be – the company is facing some major issues right now and investors should consider them before deciding what to do.
One is the political environment. Tense relations between the United States and China are a potential problem for the iPhone maker both in terms of its production base and its customers.
Another is that the United States Department of Justice won its case accusing Alphabet of being an illegal monopoly. This could have implications for the fees you pay Apple to maintain this status.
These are reasons to consider a sale, but there is still strong growth coming from the company's services division. And this means investors need to be careful about the risk of selling too soon.
The lesson for investors
Finding great investment opportunities is not easy, but this is only part of how to get good returns from the stock market. The other part is to avoid selling them too soon.
With Apple, Buffett said in May that the decision to reduce Berkshire's stake was for tax reasons. And I'm inclined to take this at face value, rather than looking for a deeper meaning.
That means I think investors considering selling should carefully weigh the company's growth prospects. And while the stock may seem expensive, that's not a sufficient reason on its own.
