How Much Apple Is Too Much? A Study In Concentration Risk And Risk Tolerance

Summary

This article is a follow-up to my recent article, “Quantifying Bubble Risk: Market Vs. Top 100 S&P Companies Individually”

Apple is now my largest individual equity holding. By far. And it is growing, up 21.3% over the past 30 days and 8.6% for past five days.

Consider this: Apple is now 7% of your S&P 500 ETF, 5% of the Vanguard Total Market fund, 12%+ of QQQ, and approaching 50% of Berkshire Hathaway.

My goal for this article is to discuss investor risk tolerance, a theme every investor needs to consider when a single stock or sector becomes a significant percentage of net worth.

My Apple exposure exceeds my in-house rule for single equity exposure. Do I ratchet back Apple exposure or “let it ride”? Here’s why I have diversification rules. Here’s my plan.

Nikada/iStock Unreleased via Getty Images Risk Tolerance When Markets are Frothy

I spend considerable time evaluating portfolio risk. A durable portfolio should have a mix of assets that do not correlate and can survive harsh economic cycles.

Recently I wrote an article about bubble risk . The article not only studied the overall Market, but also current valuations of the top one hundred companies in the S&P 500 by market cap.

Here are key observations from the article: By all historic measures, the Market is in bubble territory. See the article for details.

A small number of companies comprise a high percentage of the value of the S&P 500: Aggregate market cap of the top ten equals 30% of the S&P 500’s market cap.

Valuations vary significantly among the top 100 S&P companies.

For example, NVIDIA Corp. ( NVDA ) alone trades for the aggregate value of the nine smallest members of the S&P 100, which includes General Motors Co. ( GM ), Gilead Sciences, Inc. ( GILD ), PNC Financial Services Group, Inc. ( PNC ), TJX Companies, Inc. ( TJX ), Marsh & McLennan Companies, Inc. ( MMC ), Lockheed Martin Corp. ( LMT ), Mondelez International, Inc. ( MDLZ ), Stryker Corp. ( SYK ), and Charter Communications, Inc. ( CHTR ).

And Then There is Apple

At breakfast last week with a friend, our discussion turned to investing. In the course of our discussion, he said Apple Inc. ( AAPL ) was his biggest individual holding.

I responded, “same with me.” And I suspect the same with you if you are reading this article and have owned Apple for a while.

Ten years ago, Apple Inc. closed at $14.06. At the time of this writing, it is going for $178.45, up 21.3% over the past month.

Here’s a chart showing the flight path of Apple shares since December 11, 2011. (Reminder, Apple had a 7:1 split in 2014 followed by a 4:1 split in 2020.) SPY, QQQ, and Vanguard Total Market

Owners of Apple shares should calculate how much Apple they own in funds and Berkshire Hathaway Inc ( BRK.A ) ( BRK.B ).According to www.Ycharts.com, Apple now makes up: Seven percent of SPDR® S&P 500 ETF Trust ( SPY ) Five percent of Vanguard Total Stock Mkt Index Adm ( VTSAX ) 12%+ of Invesco QQQ Trust ( QQQ ) Then there is Berkshire Hathaway Everyone knows that Berkshire Hathaway owns Apple. In John Vincent’s November 16 article on Buffett’s company, he noted that Apple comprised 43% of Berkshire Hathaway’s value as of September 30. Since then, Apple is up 26.8% while the S&P is up 9.7%. The math tells us Apple is now approaching 50% of Berkshire.Talk about concentration risk.According to Mr. Vincent, Berkshire made two big investments in Apple. The first in Q1 2016 and the second in Q1 2018. Berkshire’s average cost of shares is ~$35.This next graph shows 10-year price change for Apple, three big funds, and Berkshire Hathaway Inc. Bigger than Germany and U.K. As someone who owns BRK.B, VTSAX, and SPY as well as Apple, I find myself tallying up my exposure to this one mega-stock that is approaching a $3 trillion market cap and a valuation about to exceed the entire German stock market and the U.K. economy .Amazing. The Strong Buy Case for Apple No doubt, there are compelling reasons to own Apple. All data sourced from Apple’s most recent 10-K and www.ycharts.com. Profit Machine Over the past 12 months, Apple has earned $94.7 billion; for perspective, that number is equal to the combined profits of the 39 S&P 100 companies with the lowest profits over the past year. Apple’s most recent ROE is 144%; […]

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