When it comes to investing greats, Berkshire Hathaway (BRK.A -0.08%) (BRK.B 0.09%) CEO Warren Buffett is in a class of his own. Growth investors might marvel at Cathie Wood's recent returns, but it's Buffett who's run circles around most investment managers on Wall Street.
According to Berkshire Hathaway's annual shareholder letter, the Oracle of Omaha's company has averaged ... averaged ... a 20% annual return since 1965. That compares to a 10.2% total return (including dividends) for the benchmark S&P 500. This nominal annual difference of 9.8% might not sound like much, but when compounded over 56 years, it equates to an outperformance of the S&P 500 of 2,787,072%!
What's even more striking is that Buffett is achieving these gains without a lot of diversification. The Oracle of Omaha has always believed that diversification is only necessary if you don't know what you're doing.
Following decades of digging into income statements and balance sheets, Buffett and his investing lieutenants -- Todd Combs and Ted Weschler -- have narrowed their interest to three sectors. As of this past weekend, the following three sectors made up 82% of Berkshire Hathaway's $291 billion investment portfolio.
Information technology: 38.83%
What's interesting about a Buffett portfolio with a nearly 39% weighting for tech stocks is that:
- Buffett hasn't historically been a big fan of tech.
- Only two stocks comprise this entire 38.83% weighting.
The two tech stocks Berkshire Hathaway owns are Apple (AAPL -0.29%), the largest publicly traded company in the U.S., and cloud data warehousing company Snowflake (SNOW 3.21%), which is by far the fastest-growing company that Buffett owns. Of course, there's a huge disparity in weighting between the two.
The position in Snowflake, which was opened in September 2020, equates to only $1.45 billion. The roughly 6.13 million shares that Berkshire Hathaway purchased was certainly the work of one or both of the Oracle of Omaha's investing lieutenants. A company focused on helping businesses seamlessly share and store data in the cloud isn't something Buffett spends his time researching.
Meanwhile, Berkshire's position in Apple was worth a cool $111.6 billion as of this past weekend. Buffett has affably referred to Apple as his company's third business.
Apple's success can be attributed to its ongoing innovation and the incredible loyalty of its customers. The iPhone remains its best-selling product, with lines for new products usually wrapping around its stores.
Apple intends to generate the bulk of its long-term growth from services. CEO Tim Cook is overseeing the multiyear transition emphasizing these high-margin services that should help smooth out quarter-to-quarter sales and further boost customer loyalty.
If not for the coronavirus pandemic walloping bank stocks and Buffett significantly paring back his company's stake in Wells Fargo (WFC -1.30%), financials would probably be Berkshire's largest weighting by sector. In total, Berkshire Hathaway holds 14 financial-sector stocks that make up close to $91 billion of the company's $291 billion of invested assets.
With a market value of $40.8 billion, Bank of America (BAC -1.38%) is the largest holding of the financial sector for Buffett. BofA is the most interest-sensitive of the big banks, so it'll benefit the most when the Federal Reserve begins raising interest rates. It's also been proactive by promoting digital banking options and consolidating its branches to reduce noninterest expenses. But Buffett's favorite thing about Bank of America might just be its capital-return program, which stood at $37 billion before being interrupted by the pandemic.
The reason the Oracle of Omaha loves bank stocks is simple: They're money machines when the U.S. economy is expanding. Although recessions are inevitable, they tend to last mere months. Comparatively, economic expansions usually last for years or well over a decade, as was the case for the last expansion (2009-2020). Buffett is more than willing to navigate through short-term troughs to take advantage of the long-term tailwinds from an expanding economy.
But as we've learned over the past three years, one thing Buffett won't tolerate is a management team he can't trust. Wells Fargo's unauthorized account scandal between 2009 and 2016 seems to be more-than-enough reason to kick Buffett's second-longest-tenured holding to the curb. Once Berkshire Hathway had a nearly 480 million-share stake in Wells Fargo but now owns only 52.4 million shares. Expect this figure to decline further in 2021.
Consumer staples: 12.13%
Finally, Warren Buffett and his investing team had more than $35 billion invested in five consumer staples stocks, as of this past weekend. This works out to about 12.1% of Berkshire Hathaway's portfolio and represents at least a two-decade low in weighting. For some context, consumer staples made up 46.1% of Berkshire's portfolio in the third quarter of 2001.
If there's a common theme with Buffett's consumer staple holdings, it's that patience pays off. Coca-Cola (KO -0.65%) makes up the lion's share of this sector, with a market value of $21 billion, and is Berkshire Hathaway's longest-tenured holding at 33 years. Based on an initial cost basis of $3.25, the Oracle of Omaha is reaping an annual dividend yield on cost of 52% on Coke!
The lure of consumer staples is that investors know exactly what to expect. Companies that provide basic-need goods and services usually have highly predictable revenue and cash flow, making them excellent candidates to pay an above-average dividend yield. It's no secret that Warren Buffett loves a hearty dividend payment.
However, the growing influence of Combs and Weschler over Berkshire Hathaway's day-to-day portfolio makes it likelier that we'll see consumer staples fade into the background. Both of Buffett's investing lieutenants have shown a willingness to take bigger risks and chase after faster-growing businesses.