Warren Buffett's Apple stake gives him a piece of the greatest 'toll road' in history, investor Bill Brewster says
- Warren Buffett likes toll bridges due to their market clout, pricing power, and low capital costs.
- Apple's iPhone is the "best toll road that's ever been created," investor Bill Brewster said.
- Buffett dreamed of owning a toll bridge as a boy, and later controlled nearly a quarter of one.
Warren Buffett loves to own businesses that are like toll bridges — they dominate their markets, require little capital investment, and can raise prices without losing customers to competitors. The famed investor and Berkshire Hathaway CEO may have found exactly that in Apple and its flagship smartphone.
"Buffett got his toll road, and it's the best toll road that's ever been created, the iPhone," Bill Brewster, a Berkshire shareholder and the host of "The Business Brew" podcast, said during a recent episode of "Value: After Hours."
"The toll road looks like something that everyone carries around in their pocket and looks at almost 40 times a day," he continued. "You've got to put R&D into Apple, but you sell these devices at huge gross margins, and then you just take, and take, and take, and take. That's a hell of a business."
Apple earned a gross margin of 43% in the three months to December 25, and its research-and-development costs were equal to just 5% of its revenue in the period. Berkshire has more than tripled its money on the consumer-electronics company in under five years, and now commands a $158 billion stake.
Buffett has praised Apple as potentially the best business he knows. Its similarities to a toll bridge in terms of high margins, pricing power, and market position might explain why.
After all, the billionaire investor has fantasized about collecting tolls since he was a boy, author Roger Lowenstein reported in "Buffett: The Making of an American Capitalist."
"All that traffic," Buffett lamented to a friend's mother while sitting on her porch, watching the cars drive past. "What a shame you aren't making money from the people going by."
Many years later, Buffett and his business partner, Charlie Munger, tried to buy the Detroit International Bridge Company, the owner of the only toll bridge controlled by stockholders in the US. The pair ended up owning 24% of it, Lowenstein wrote.
Buffett explained his passion for those kinds of businesses during a court hearing in 1977, according to Lowenstein.
"I have said in an inflationary world that a toll bridge would be a great thing to own if it was unregulated," the Berkshire chief said.
"Because you have laid out the capital costs," Buffett added. "You build the bridge in old dollars, and when there is inflation, you don't have to keep replacing it — a bridge you build only once."