Warren Buffett, Sun Tzu and the Ancient Art of Risk-Taking

Tobias Carlisle has published a fantastic new book: Soldier of Fortune – Warren Buffett, Sun Tzu and the Ancient Art of Risk-Taking

Here is an interview with Tobias talking about the book and below the interview is an excerpt from the book. You will enjoy it.

The Skillful Leader Subdues the Enemy Without Fighting

The skillful leader subdues the enemy’s troops without any fighting; he captures their cities without laying siege to them; he overthrows their kingdom without lengthy operations in the field.

With his forces intact he will dispute the mastery of the Empire, and thus, without losing a man, his triumph will be complete.

—SUN TZU, The Art of War, c. 430 BC

(Giles, III. §6-7, 1910)

In 2013, investors David Einhorn and Carl Icahn mounted separate activist campaigns targeting Apple, Inc. under Tim Cook’s new leadership. They shared a common goal: unlocking the value trapped in Apple’s enormous cash holdings, which stood at $150 billion.

Einhorn, through Greenlight Capital, held about $600 million in Apple shares. He pushed Apple to pay out some of the huge pile of cash. Einhorn said Apple’s $150 billion in cash was too much for a stock with only $60 billion in fixed assets. It earned next to no interest. It was better in the hands of shareholders. Einhorn said Apple’s stock price was discounted to the value of the cash. It could “unlock significant shareholder value” by paying out the cash on its “bloated balance sheet.”

Einhorn focused his attack on his “iPref” proposal. Apple should create a special dividend-paying preferred stock. This would allow Apple to return capital while preserving flexibility and overseas cash reserves. Despite winning a lawsuit against Apple over shareholder voting, Apple didn’t adopt Einhorn’s iPref proposal. His offensive did contribute to Apple expanding its capital return program to $100 billion.

Icahn entered more aggressively in August 2013, starting with a $1.5 billion stake that grew to $3.6 billion. Unlike Einhorn’s more technical approach, Icahn used his trademark aggression and public pressure tactics. In an open letter to Cook, Icahn called Apple “extremely undervalued.”

When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short-term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever.

A share buyback or stock repurchase happens when a company buys its own shares on the stock market. This reduces the number of shares available to the public. It is a return of excess cash like a dividend payment, but it is directed only to selling shareholders. With fewer shares outstanding, it increases earnings per share and improves operational efficiency ratios like return on equity.

Icahn used media appearances, open letters to Cook, and proxy fight threats to demand Apple increase its buyback to $150 billion. He dropped his proposal in February 2014 after Apple bought back $14 billion of shares following a price decline.

Both activist campaigns reflected different styles but similar insights: Apple held too much cash given its strong cash flows. Both recognized that much of Apple’s cash was trapped overseas due to U.S. tax laws. Their impact was substantial—by April 2014, Apple had increased its share buyback program to $90 billion, raised its dividend by 8 percent, and announced a 7-for-1 stock split.

About two years later and in stark contrast to the public activist approaches, Warren Buffett quietly began buying Apple stock. Buffett’s investment was one of the most significant in his career, marking a notable shift in his approach. Berkshire Hathaway, Buffett’s holding company, began buying Apple shares in early 2016. The initial stake was 9.8 million shares valued at about $1 billion.

It marked a significant departure from Buffett’s prior aversion to technology companies. Throughout his career, he had avoided technology stocks, preferring businesses whose prospects he thoroughly understood. His recent disappointing experience with IBM made the Apple investment even more surprising to Buffett watchers.

Rather than pushing for quick financial changes like the activists, Buffett saw Apple as a core, long-term holding. He viewed it as a consumer products business with extraordinary brand loyalty and pricing power, not a technology company.

Apple’s worldwide brand recognition attracted him, along with the durable “moat” of its products. Buffett saw that Apple’s product ecosystem encouraged recurring revenue with minimal capital requirements. Under Cook’s exceptional management, the company would likely continue throwing off cash as it grew.

Buffett dramatically increased Berkshire’s Apple holdings from 2016 to 2018. By early 2022, Berkshire’s stake had grown to almost 900 million shares (accounting for Apple’s 4-for-1 stock split in 2020), making it Berkshire’s largest equity position by far.

The fundamental difference in strategies was striking. While activists Einhorn and Icahn sought to quickly unlock value through capital-structure changes, Buffett focused on long term business fundamentals and competitive advantages.

The activists applied public pressure for specific corporate actions within months, while Buffett patiently built his position over years, trusting management’s abilities. Where the activists found a new manager with a bloated balance sheet needing fixing, Buffett found the opportunity perfected—it was still an exceptional business, efficiently managed, but now it had a streamlined balance sheet too. The activists had succeeded in breaking Apple’s resistance to a buyback.

The timing was also telling—the activists targeted Apple during market uncertainty after Steve Jobs passed away. Buffett invested after Cook had proven his leadership abilities and streamlined the capital structure. This contrast highlights the fundamental difference between activist investors seeking catalysts for short-term value realization versus Buffett’s approach of identifying exceptional businesses for long-term ownership.

The scale and success of Buffett’s investment was remarkable. By the second quarter of 2023, Berkshire’s Apple stake was worth $160 billion. It was over 40 percent of Berkshire’s stock portfolio. Unrealized gains exceeded $100 billion. The investment dominated Berkshire’s assets and financial results. Apple’s share price movements became the single largest determinant of Berkshire’s reported quarterly earnings. Icahn and Einhorn had made gains primarily through capital structure changes they pressed on Apple. Buffett’s passive, long-term approach yielded extraordinary returns through Apple’s business growth and stock appreciation.

By late 2024 Buffett had slashed the position by two-thirds to 300 million shares worth $70 billion. Even so, Apple remained Berkshire’s largest equity holding. Berkshire’s cash reserves had risen to a record $334 billion, up from $128 billion in 2022—most of it from the sale of Apple. It was a singular investment by a singular investor. No other investor in the world could have deployed so much capital at one time in one position. It was the most profitable investment of all time—a huge return on an enormous sum of money—and arguably the greatest trade ever.

The greatest trade of all time is like modern art—it’s in the eye of the beholder. There have been bigger proportionate gains from smaller investments. But it was those investments that brought those other investors fame, making them indistinguishable from lucky lottery tickets. They were unknown before the investment succeeded. Nothing rivals the scale of Berkshire’s position in Apple, the absolute size of the profit, its impact on Berkshire’s portfolio, and the proportionate return. It is a striking glimpse into the strategy of the greatest investor who has lived at the absolute peak of his powers.

Buffett’s success with Apple is largely unheralded because we are so familiar with both Buffett and Apple. Buffett was famous when he made the investment, already an avatar for investors for decades. Apple was hiding in plain sight. It was one of the largest companies in the world, and its products were everywhere—it is perhaps the most successful consumer products company ever. Buffett had no special information or access. The victory brought him “neither reputation for wisdom nor credit for courage.”

Contrast Buffett’s approach to the one taken by activist investors Icahn and Einhorn. Without publicly condemning Apple or Cook, Buffett enjoyed the fruits of the ongoing buyback and encouraged it. Buffett had an iron-fisted message for the managers of his public companies, but he delivered it in a velvet glove:

Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All too often, we’ve seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander. That’s not going to happen again at Coke and Gillette, however—not given their current and prospective managements.

He applied as much pressure with a policy of praising management as others did attacking them and with none of the harsh words or bad feelings. He achieved the same ends without quarrel. It was yet another example of Buffett succeeding without conflict and doing it effortlessly. He wins with ease because he seeks battle only after victory is won.

Buffett observes the ancient laws of strategy first described by Sun Tzu. This is a book about those ancient laws and how Buffett applies them in industry and investment.

[T]o fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.

—SUN TZU, The Art of War, c. 430 BC

(Giles, III. §2, 1910)

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