Author | Shu Ying Heng Xie
Data Support | Gougu Big Data
What is the single most profitable stock in Warren Buffett's storied career? If you answered Coca-Cola, Gillette, The Washington Post, or JPMorgan Chase, you might be missing the true essence of Buffett's investment philosophy.
On January 29, Apple Inc. released its Q4 2019 earnings after the market closed, comfortably beating expectations. Its stock price soared to a new all-time high in after-hours trading.
Apple's stellar performance propelled its share price to record levels—and the biggest beneficiary was none other than Warren Buffett, the "Oracle of Omaha," who famously once shunned technology stocks. Buffett began buying Apple shares in 2017, with a total acquisition cost of around $36 billion. Today, his Apple stake is worth approximately $83 billion. In just three years, this investment has generated a staggering $47 billion in gains—nearly $20 billion more than his total profit from Coca-Cola. It stands as the single largest investment return in Buffett's seven-decade career.
In recent years, Berkshire Hathaway's stock has consistently lagged behind the broader market. Buffett now sits on a $110 billion cash pile and hasn't made a signature investment like Coca-Cola or The Washington Post in a long time.
Yet, few could have predicted that at 87, the Oracle would place a massive, concentrated bet on Apple—securing yet another legendary milestone for his investment career.
1. From Coca-Cola to Apple
Buffett's love for Coca-Cola is legendary—he's said to drink five cans a day. At Berkshire Hathaway's annual meetings, it's rare to see him or Charlie Munger without a Coke in hand.
In 1987, Coca-Cola was struggling: Pepsi had ignited tensions with bottlers, and Coke's stock was languishing. The company embarked on aggressive share buybacks, ending the year with a share price of $38.10.
In 1988, Buffett began aggressively accumulating Coca-Cola shares. By year's end, he held 14.17 million shares at a total cost of $592 million—an average of $41.80 per share. The following year, he doubled down, increasing his holdings to 23.35 million shares with a cumulative cost of $1.024 billion; the new shares were acquired at an average price of $46.80.
After nearly three years of sideways movement, Coca-Cola's net profit climbed to $2.55 billion in 1994, and its P/E ratio gradually declined. Buffett seized the opportunity, purchasing an additional $270 million worth of shares post-split at an average price of $41.60.
A decade after Buffett's initial investment, Coca-Cola's market cap had skyrocketed from $25.8 billion to $143 billion. During that period, the company generated $26.9 billion in profits, paid $10.5 billion in dividends to shareholders, and retained $16.4 billion for reinvestment. For every dollar retained, it created $7.20 in market value. By the end of 1999, Buffett's original $1.023 billion investment in Coca-Cola had ballooned to a market value of $11.6 billion. The same amount invested in the S&P 500 Index would have grown to only $3 billion.
After 1999, Coca-Cola entered a phase of stable growth, and its stock underperformed for years. As the largest shareholder, Buffett didn't sell a single share—and since 1999, Coca-Cola's stock has risen an additional 134%.
Coca-Cola remains the quintessential case study of Buffett's value-investing philosophy. Yet, despite his long-standing aversion to tech stocks, Buffett managed to surpass his Coca-Cola returns in just three years—with Apple.
In the first quarter of 2016, Berkshire Hathaway initiated a position in Apple, with one of Buffett's investment managers independently purchasing 9.81 million shares for $1.069 billion. This move caught Buffett's attention.
Berkshire continued to build its stake, nearly quadrupling its holdings by the end of the year. By December 2016, the company held 61.243 million Apple shares at a total cost of $6.75 billion, averaging $110.17 per share.
In a February 2017 interview, Buffett revealed he had personally bought over $8 billion worth of Apple stock in January, bringing Berkshire's total holdings to more than 133 million shares. This meant his personal buying spree had doubled the firm's position in just 30 days.
By the fourth quarter of 2017, Apple had surpassed Wells Fargo to become Berkshire Hathaway's largest equity holding.
Buffett aggressively increased the stake three more times in 2018. In Q1, Berkshire bought roughly 74.2 million shares, boosting its position from 165.3 million to 239.5 million shares. Purchases in Q2 and Q3 raised the total to 251.9 million and 252.5 million shares, respectively.
According to its Q3 2018 filing, Berkshire Hathaway became Apple's third-largest shareholder with a 5.31% stake. Apple's weighting in Berkshire's portfolio surged from 14.63% to 25.79%—more than double the 11.69% allocation to its second-largest holding, Bank of America.
In February 2019, Berkshire disclosed a reduction of 2.9 million Apple shares the prior quarter, trimming its holdings from 252.5 million to 249.6 million. Apple's portfolio weighting fell from 25.79% to 21.51%, a drop of 4.27%. It was later confirmed that Buffett did not sell any shares himself; the trades were executed by his investment managers.
Starting in Q4 2018, Apple's stock price plummeted, losing 37.7% of its value over three months and erasing $396.2 billion in market capitalization. The value of Berkshire's Apple holdings fell from $57 billion to under $40 billion—a paper loss exceeding $17 billion.
Despite the downturn, Buffett remained bullish. On January 2, 2019, Apple began to rebound with the broader U.S. market, ultimately rising 100% over the following year.
2. What Changed—and What Didn’t—For Buffett
As is well known, the young Buffett learned value investing under Benjamin Graham and spent his entire career practicing this philosophy.
His core investment logic has remained unwavering: within his circle of competence, buy outstanding businesses with wide economic moats at reasonable or undervalued prices (i.e., with a margin of safety) and hold them for the long term.
This logic sounds simple but is incredibly difficult to execute. First, most investors overestimate their abilities, venturing far beyond their circle of competence. Few have the clarity to accurately define the boundaries of their own expertise. When a hot sector—one you don't understand—is booming, with brokers pushing it, influencers cheering it on, and friends jumping in, how much discipline does it take to stay completely on the sidelines?
Second, judging price versus intrinsic value remains the central challenge of investing. Every investor uses their own valuation framework. For Buffett, the longstanding method has been the discounted cash flow (DCF) model.
In essence, DCF is straightforward: a company's value equals the present value of all its future cash flows. If it's undervalued, you buy. If it's overvalued, you sell.
To accurately assess a company's true value, you need high confidence in your projections of its future cash flows and your chosen risk premium. Otherwise, the margin for error can be significant.
For Warren Buffett, however, the discounted cash flow (DCF) model is more of a conceptual framework than a calculation tool—he rarely crunches the numbers himself. This approach is built on his profound understanding of the types of businesses suitable for this valuation method.
Third, hold outstanding companies with wide economic moats for the long term. A company's rise or fall, or an industry's transformation, can become clear in just a few years. Investing seeks returns based on a confident assessment of future certainty. Only exceptional companies with deep moats can consistently strengthen their position amid future uncertainties and fierce competition, delivering reliable returns to investors. Long-term holding isn't the goal in itself, but rather the natural outcome. True value reveals itself over time—outstanding companies prove their worth across extended periods.
Why didn't Buffett buy Coca-Cola before 1988? He thought it was too expensive. He had been watching the company for years—Coca-Cola fit perfectly within his "circle of competence": a simple business, a focused product line, a strong history of consistent operations, and the ability to generate predictable future cash flows with minimal capital investment.
Buffett waited until the stock price fell to a level that provided what he considered a sufficient "margin of safety" before he started buying. No matter how great a company is, paying too high a price will inevitably dilute your future returns.
So why didn't he buy Apple before 2016? Because, until then, Apple fell outside his circle of competence. Buffett had long avoided technology stocks due to their volatile earnings and the industry's rapid pace of change, which made future cash flows extremely difficult to predict.
What changed his mind about Apple? In a 2017 interview, he explained:
"While Apple incorporates a lot of technology, it is, to a large extent, a consumer goods company.
When I take my great-granddaughter to Dairy Queen for ice cream, she often brings friends. Almost every one of them has an iPhone. I ask them what it does, how they use it, and whether they could live without it. They're glued to their Apple devices, barely talking to me unless I'm buying the ice cream.
I realized Apple has incredible customer loyalty, and its products provide exceptional utility.
Looking at Apple's profitability, I think Tim Cook has done an extraordinary job—the company's capital allocation is remarkably shrewd. I don't know exactly what goes on in Apple's labs, but I know what's on its customers' minds because I've spent considerable time talking to them directly."
We see that Buffett evaluated Apple from angles he thoroughly understood: smartphones had become ubiquitous consumer goods—not just tech products, but essential consumer staples.
Buffett only began buying Apple—the industry leader—after smartphone adoption had matured, when he could clearly grasp the industry's logical trajectory. Leveraging the inherent appeal of its products, Apple cultivated new business models that deepened its economic moat, cementing its status as an indispensable, high-value consumer brand.
So, from Coca-Cola to Apple, what remains constant in Buffett's philosophy is his unwavering commitment to his circle of competence. What evolves is his continuous learning, which expands his knowledge and broadens that very circle.
3. Insights for Ordinary Investors
Many people wonder: why stress both "staying within your circle of competence" and "expanding your circle of competence"?
Renowned Chinese investor Qiu Guolu once shared this insight:
During a conversation with Bridgewater Associates founder Ray Dalio, I asked him: "Warren Buffett constantly emphasizes staying within one's circle of competence, yet you focus on continuous evolution and breaking beyond it. Why the difference?"
Dalio sidestepped the question at the time. Later, I realized the answer myself: during research, we should constantly push beyond our current boundaries and learn to expand our cognitive capacity. But when making actual investment decisions, we must strictly operate within our established circle of competence and avoid venturing beyond it.
In China, many self-proclaimed "value investors" rigidly apply outdated frameworks—like the ancient parable of marking the boat to find a lost sword—mechanically copying Buffett's approach. They oversimplify his philosophy as mere "value investing," then reduce that further to buying traditional companies and holding them forever. In reality, the true skill lies in balancing change and continuity around the core concept of "value," and knowing when to be steadfast versus adaptable over time. Buffett bought Coca-Cola within his circle of competence—and later, Apple.
At Berkshire Hathaway's 2018 annual meeting, Buffett himself admitted he missed the entire internet era. He expressed regret over not buying Amazon or Alibaba—but so what?
Compared to missing opportunities ("dry powder"), making wrong investments is far more damaging. Investing always reflects your personal level of cognition—which companies you profit from, and how much you earn, depends entirely on how your individual capabilities and personality align with the opportunity.
Today, most investors treat the market like a casino—daydreaming about unrealistic returns, chasing momentum (buying high and selling low), jumping on trends, or speculating on hype stocks. Few take the time to rigorously study a company's intrinsic value.
Buffett was 58 when he first bought Coca-Cola, and 86 when he invested in Apple. He has consistently expanded his circle of competence, practicing value investing through lifelong learning.
Charlie Munger once said of Buffett: "In my long life, nothing has served me better than continuous learning. Take Warren—if you tracked his time, you'd find he spends half his waking hours reading. The Buffett of today is a far better investor than the man I met decades ago, and so am I. I've watched him for years. His extensive learning has allowed him to expand his circle—enabling him, for instance, to invest in PetroChina."
Therefore, investing is both extremely difficult and remarkably simple. Ultimately, success depends on how well your understanding of corporate value aligns with your own character. If you can accurately assess companies within your circle of competence, buy at reasonable prices, patiently hold outstanding businesses, and commit to continuous learning to steadily elevate your understanding, your investment performance will likely be solid.