In a report released May 4, 2024, Berkshire Hathaway revealed that it has sold about 115 million shares of Apple, for proceeds of about $20 billion.

About a year ago, in June 2023, we observed that Apple shareholders had enjoyed a phenomenal run. At that time, about a year ago, the company had a market cap of about $2.8 trillion.

Today, the market cap of Apple is still about the same. In the past year, the price of Apple has mostly just bounced around.

That bouncing is volatility, also called risk. You might want to consider how much uncompensated risk your clients are taking. Why? Because trees, even Apple trees, don’t grow to the sky.

As of this writing, Apple has a market cap of about $2.8 trillion.

Perhaps Apple is worth $2.8 trillion. Is it? Maybe. Maybe not. Only time will tell. Buffett seems to think it’s a price he’s happy to sell at.

However, that is probably the wrong question.

The right question for owners of large amounts of Apple is: can I expect to be compensated for the risk I take in my Apple?

Apple has much more risk than the S&P 500, as measured by volatility, or standard deviation of return. Here’s a chart that illustrates how over the past year Apple has been almost twice as volatile as the S&P 500. The blue line, as above, is Apple’s share price, and the purple line is the value of the S&P 500, normalized to the same starting price as Apple.[1]

We all know the expression, “Don’t put all your eggs in one basket.”

If you didn’t already own Apple, would you put all – or a large fraction – of your eggs in a single basket called Apple? Or would you rather own a diversified portfolio, such as the S&P 500?

Apple’s Future – Irrational Exuberance?

We have no crystal ball, and no special insight. But we can do math.

Since 2000, Apple has returned a compounded annual return of almost 40%.

Mathematics assures us that it is virtually impossible that it will do so over the next 23 years.

Here’s the math.

Apple is worth $2.8 trillion today.

If that $2.8 trillion were to grow by a compounded 40% a year for 23 years, that $2.8 trillion would have to grow to $6.4 quadrillion. Let’s put that in perspective.

According to a recent McKinsey study, total GLOBAL assets today are worth roughly $500 trillion.

Global GDP has grown at about 3% since the 1960s. The total value of global assets can’t grow much faster than the GDP growth rate over the long run.

If we compound $500 trillion at 3% per year for 23 years, we get $986 trillion.

In other words, the entire value of ALL GLOBAL ASSETS in 23 years is likely to be about $986 trillion, or roughly 1 quadrillion.

It is mathematically impossible for Apple, or any company, to be worth more than all the assets in the world.

Taxes

Aside from an irrational faith that Apple can continue to outperform as it has in the past, the main reason people don’t diversify holdings is taxes.

People who have big gains in Apple, and sell, will pay a lot of tax. Unless they do some simple planning.

Solutions

Many advisors are familiar with several possible solutions, including exchange funds, and various hedging strategies. But not all are aware of a tax exempt Stock Diversification Trust.

A qualifying stock diversification trust is a tax-exempt entity that allows the client to sell a stock, keep 100% of the proceeds available for reinvestment, and produce income for the client and the client’s family. When we run the numbers on these trusts, using the trust, instead of selling and paying the tax, the family in most cases can expect to get more than twice as much total net spendable income.

To Learn More

Sterling has published an Advisors Guide to Concentrated Stock Positions. If you would like a free copy, please request it here. Or if you have a current client situation and would like to discuss it with us, please call 703 437 9720 and ask for Connor.

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[1] To normalize the S&P 500 price, we set the value for the S&P equal to the share price of Apple on the first day of the period. To compute each subsequent day’s normalized value, we multiplied the current day by the return on the S&P between the base day and the following day. This is a standard procedure.