As a rule-of-thumb, if an investment has a Return on Equity (ROE) of greater than 30%, it means the company has a Durable Competitive Advantage.
Apple's Return on Equity (ROE) is at a staggering 34%. In the book Buffettology*, the ROE is the anticipated compounding growth rate of a company's earnings for the next 10 years. The last time Warren Buffett invested in a company with an ROE of greater than 30% was in 1994 when he purchased Coca-Cola (KO). Coca-Cola turned out to be one of Buffett's most lucrative investment.
I should have seen this coming.
I've always thought that Apple was a technology company and Warren Buffett has always advised against investing in technology companies because of the amount of money that they spend on Research and Development. Technology companies spend so much money on Research and Development that they are unable to significantly grow their Shareholder's Equity. Shareholder's Equity is also called Total Equity.
However, Apple seems to be an exception to this rule. They have the lowest Research and Development to Gross Profit Ratio when compared to other Technology companies. And their Shareholders' Equity (also called Total Equity) is at $119 Billion for the year 2015. This means Apple is able to grow their Shareholders' Equity because of their low Research and Development to Gross Profit Ratio. In other words, when compared to their Gross Profit, the money they spend on Research and Development is small, and thus, the company can save more money. The more money they save, the bigger their bank account grows. The bigger their bank account grows, the bigger their Shareholders' Equity will grow. As Apple's Shareholders' Equity grows, the value of the company will also grow.
We sold Apple some time last year and now we are buying it back.
*Reference:
Mary Buffet, Clark, Buffettology, Chapter 16
Disclosure: We own shares in Apple. |
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