When Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.32%) CEO Warren Buffett speaks, Wall Street and investors intently listen. That's because Buffett has a track record few other money managers can hold a candle to.
Over the past 55 years, Berkshire's stock has delivered a compound annual gain of 20.3%, which more than doubles the total return of the S&P 500 on an annualized basis (i.e., including dividends) over the same time frame. Overall, this works out to a gain of 2,744,062% since the beginning of 1965. As CEO, Buffett has also overseen the creation of more than $400 billion in value for his company's shareholders.
Given the Oracle of Omaha's long-term success rate, there aren't too many events investors look forward to more than the quarterly filing of Berkshire Hathaway's 13F with the Securities and Exchange Commission. This filing, which is required of money managers with over $100 million in assets under management, provides a snapshot of what Berkshire Hathaway was holding at the end of the third quarter. It also allows us to see what Buffett and his investment team bought and sold.
Between what was contained in Berkshire Hathaway's 13F and the company's third-quarter (Q3) operating results released a few weeks prior, I can confidently say that Warren Buffett made history in Q3... twice.
The largest concentration in a single sector in at least 20 years
One of Warren Buffett's little-known quirks is that, in spite of having a nearly $246 billion investment portfolio, he's not all that big on diversification. In Buffett's view, if you know what you're doing, there's no need to overly diversify. Nearly 90% of Berkshire Hathaway's invested capital is tied up in only three sectors: technology, financials, and consumer staples.
However, what really stands out about the company's third-quarter 13F filing is its concentration in information technology. At the end of September, Buffett's company had 48.45% of its invested assets in tech stocks. That surpasses the 48.42% of invested capital tied up in financials during the fourth quarter of 2005. At no point in at least the last 20 years has a Warren Buffett portfolio been more concentrated in a single sector.
What's funny, though, is this lack of diversification continues at the individual stock level. In spite of this huge concentration, Berkshire's exposure to information technology is limited to two stocks: Apple (AAPL 0.19%) and Snowflake (SNOW -4.48%).
Snowflake was added during the third quarter with the purchase of more than 6.1 million shares. Cloud data warehousing is well beyond the scope of Buffett's investing comfort zone, meaning this high-growth company was certainly added by one of his investing lieutenants, Todd Combs or Ted Weschler. Snowflake accounted for about $1.54 billion of invested capital at the end of the third quarter.
Then there's Apple, which almost accounts for half of Berkshire Hathaway's portfolio by itself -- and that's after 36.3 million shares were sold during Q3. Viewed affably as Berkshire's "third business," Buffett didn't buy into Apple because it's a tech stock. Rather, he appreciated the sustaining power of Apple's branding and the quality of its management team under CEO Tim Cook. Buffett also strongly approves of Apple using historically low-interest debt to repurchase its own stock.
The largest quarterly share buyback in history
The other history-making moment can be found in Berkshire Hathaway's Q3 earnings release from early November.
In July 2018, the company altered its policy on share buybacks. Between 2013 and 2018, the old policy didn't allow for any repurchasing activity because Berkshire's stock was never below 120% of its book value. The new policy has two key rules and allows for more liberal use of the company's capital. These rules are that:
- The company must have at least $20 billion in cash on hand before common stock repurchases can be made; and
- Buffett and right-hand man Charlie Munger must agree that Berkshire's stock is trading at a discount to its intrinsic value.
During the second quarter, Buffett and Munger gave the green light to repurchase what was then an all-time record of $5.1 billion in Class A and Class B stock. But in the sequential third quarter, Buffett and his team blew this buyback record out of the water by approving $9 billion in repurchases. Through nine months of 2020, the company repurchased $15.7 billion worth of Berkshire Hathaway stock. Buffett has thrown more money at repurchasing shares of his own company than buying any other stock since 2016 aside from Apple.
As a refresher, buying back stock reduces the number of outstanding shares, which can lead to an increase in earnings per share and a more attractive relative valuation to investors.
Buffett also believes in the roughly five dozen companies Berkshire Hathaway owns, as well as its more than four dozen current investment stakes. Having piled into cyclical businesses, the Oracle of Omaha has aligned his company's growth with that of the U.S. and global economy. Since recessions are often measured in months but periods of economic expansion usually last years, Buffett's aggressive share repurchase approach is yet another winning long-term bet on a growing economy.