When it comes to investing, few people command attention quite like Berkshire Hathaway (BRK.A -1.04%) (BRK.B -1.09%) CEO Warren Buffett. Even though Buffett has been more or less par for the course with the benchmark S&P 500 over the past decade, his company's per-share market return since 1964 has outrun the aggregate return of the S&P 500 (inclusive of dividends) by more than 2,744,000%.
How does Buffett so handily outpace the broader market? To begin with, he and his investment team aim to buy businesses that they'll hold for long periods of time. He also looks for companies that are time tested, have quality management teams, and offer sustainable competitive advantages. You could also argue that having a brand-name or household product doesn't hurt, either.
But one thing you might not realize about Buffett's investment success is that it often rests on a relatively small number of stocks. Despite holding 46 securities in Berkshire Hathaway's investment portfolio, diversification isn't high on Buffett's list. In fact, the Oracle of Omaha views diversification as protection that's needed when investors don't know what they're doing.
Of Buffett's more than $196 billion in portfolio worth, as of May 21, 2020, 68% of it was centralized in just four stocks.
Apple: $79.5 billion
Here's a statistic that might surprise you: Technology kingpin Apple (AAPL -0.66%) accounts for more than 40% of Buffett's portfolio. That's pretty amazing considering that Buffett has historically had an aversion to technology stocks.
Why Apple? The most obvious answer is the products and services offered by the company. Apple's iPhone has consistently maintained between a 42% and 45% share of the U.S. smartphone market since 2014, and it'll likely see a significant boost in demand once it unveils a 5G-capable version of its beloved smartphone, possibly by later this year. The cult-like following for Apple's wireless devices is well documented.
Apple is also in the process of transforming itself from being a product-oriented business to one that's focused on services. This ongoing transition has yielded double-digit sales growth in both wearables and services and should help lessen the occasional lumpiness associated with seasonality and tech-upgrade cycles for smartphones.
But Buffett's favorite thing about Apple might just be CEO Tim Cook and his desire to return capital to shareholders. Apple pays out approximately $14.2 billion in dividends each year and has aggressively repurchased its own common stock in recent years. Don't expect Buffett to pare down Berkshire's stake in Apple anytime soon.
Bank of America: $21.7 billion
Considering that the banking industry is Buffett's hands-down favorite, it should come as no surprise that Bank of America (BAC -1.44%) accounts for 11% of Berkshire Hathaway's invested assets.
Bank of America is the prototypical Buffett investment, in that it was undertaken during a period in which Wall Street and investors were fearful and the Oracle of Omaha had cash to invest. Today, BofA looks nothing like the mess it was when Buffett first invested $5 billion in preferred shares. It's put settlements tied to the mortgage crisis well into the rearview mirror and has vastly improved both the quality of its loan portfolio and its liquidity to withstand future exogenous shocks.
In particular, Bank of America has not been afraid to reduce its noninterest expenses by closing branches throughout the past decade. By placing a greater emphasis on digital banking and mobile apps, BofA has courted a younger generation of banking customers and made it cheaper, as a whole, for the company to process consumer banking transactions.
And, of course, Bank of America has spent the past half decade robustly rewarding its shareholders. In June 2018, BofA announced a $26 billion capital return program, which was followed in June 2019 by a $37 billion capital return initiative (with the buyback portion of that now suspended due to the coronavirus disease 2019, or COVID-19). The point is, Buffett has no reason to believe Bank of America won't remain a money machine over the long run.
Coca-Cola: $18.1 billion
Speaking of the long run, no company has been held for a longer consecutive stretch in Buffett's portfolio than beverage giant Coca-Cola (KO -2.15%). Owned since 1988, Coca-Cola currently accounts for about 9.2% of Berkshire Hathaway's invested assets.
Aside from the fact that Buffett is an avid Coca-Cola consumer, the one reason you'll probably never see the Oracle of Omaha sell this stake is because of the company's brand recognition and engagement. Coke is one of the most-recognized brands worldwide, which comes with operating in all but one country around the globe (North Korea). It's also able to easily transcend generational gaps to create long-lasting attachments. This is done through holiday-themed advertising, point-of-sale ads, and, more recently, the use of social media influencers.
Coca-Cola is also a relatively defensive and predictable company. In other words, a booming or contracting economy isn't going to make a significant difference in how many Coca-Cola products consumers buy. It surely doesn't hurt having more than 20 brands generating $1 billion or more in annual sales, either.
Then there's Coke's dividend, which currently sits at $1.64 annually ($0.41 quarterly). Coca-Cola has increased its payout for 58 consecutive years, with Berkshire Hathaway now netting a yield based on its original cost basis of 50.5%.
American Express: $13.6 billion
Last but not least, there's credit-services giant American Express (AXP -1.38%), which Buffett has held in Berkshire Hathaway's portfolio since 1993. This $13.6 billion position currently accounts for 6.9% of Buffett's invested assets.
One reason Buffett undoubtedly favors American Express is the company's ability to double dip. By this, I mean it can charge merchants fees to facilitate a credit transaction as well as lend to consumers and businesses via credit cards, thereby reaping the reward of interest and fees associated with those cards. Since the U.S. and global economy spend far more time expanding than contracting, this dual-revenue strategy comes in handy for AmEx more often than not.
American Express has also had a knack for attracting well-to-do clientele over the years. Wealthier cardholders are less likely to change their spending habits or default on their outstanding balances during a recession, which should help AmEx weather downturns in the economy better than other lenders.
But as is the case with Buffett's other large holdings, I'm sure AmEx's dividend plays a role in keeping the Oracle of Omaha satisfied. The $1.72 per-share payout equating to a 1.9% yield might not sound like much, but based on Berkshire Hathaway's initial cost basis, it works out to an annual yield on cost of more than 20%.