Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.35%) CEO Warren Buffett is one of the world's greatest investors. He's overseen the creation of more than $700 billion in shareholder value since becoming CEO in 1965, and has led Berkshire's Class A shares (BRK.A) to an average annual return of greater than 20%. This works out to an aggregate return of better than 3,800,000% since Dec. 31, 1964.
Yet what might surprise investors is that the Oracle of Omaha, as Buffett has come to be known, isn't a big fan of diversification. Even though Berkshire Hathaway's nearly $349 billion investment portfolio held 45 securities as of Sept. 30, nearly three-quarters of the company's invested assets, as of Feb. 6, were tied up in just four stocks.
Apple: $156.5 billion market value (44.8% of invested assets)
Speaking strictly from a nominal basis, tech kingpin Apple (AAPL 0.60%) is, hands down, Buffett's greatest investment.
According to the cost basis provided in Berkshire Hathaway's 2020 shareholder letter, Buffett's company holds more than 907 million shares of Apple at a cost basis of $34.26 per share. With Apple closing at $172.39 a share last week, it means Buffett's company is sitting on an unrealized gain of $125.4 billion! Additionally, with the most valuable publicly traded company in the world doling out $0.88 annually as a dividend, Berkshire is raking in nearly $799 million in annual dividend income.
Buffett has long believed that diversification is only necessary if you don't know what you're doing. With close to 45% of Berkshire's invested assets tied up in Apple, he clearly has faith in Apple's long-term growth opportunities and CEO Tim Cook.
For the time being, Apple's products continue to generate the bulk of its revenue. The iPhone remains the most popular smartphone in the U.S., with the introduction of 5G sending iPhone sales to record levels. The company's products, ranging from iPhone to Mac and iPad, have created a loyal customer base.
However, Apple's future hinges on its ongoing transformation to a service-oriented business. Focusing on higher-margin subscriptions and wearables is the company's ticket to reducing the revenue lumpiness associated with product replacement cycles.
Bank of America: $49.9 billion market value (14.3% of invested assets)
Buffett and his investing team are also absolutely crushing it with their stake in money center giant Bank of America (BAC -0.27%).
Berkshire Hathaway holds more than 1 billion shares of BofA in its portfolio at an average cost of $14.17 per share. Based on a closing price of $48.28 last week, the Oracle of Omaha is carrying an unrealized gain of $35.2 billion. Further, Bank of America's $0.84 annual payout is putting nearly $868 million in dividend income into Berkshire Hathaway's coffers.
It's no secret that Buffett loves bank stocks, and there's plenty of reason for Buffett to be infatuated with BofA. For instance, no money center bank is more interest sensitive than Bank of America. According to the company's year-end report, a 100-basis-point parallel shift in the interest rate yield curve would increase its net interest income by an estimated $6.5 billion over 12 months. With the Federal Reserve set to raise lending rates multiple times in 2022, BofA is in position to benefit more than any other big bank.
Bank of America's digitization efforts are paying off handsomely, too. Over the past three years, the number of digital active users has grown by 5 million to 41 million, with 49% of all transactions completed online or via mobile app in the fourth quarter of 2021, compared to 31% in the comparable quarter three years earlier. This digitization push is allowing BofA to consolidate some of its branches and lower its expenses.
American Express: $28.2 billion market value (8.1% of invested assets)
Buffett and his team have a large position in credit services company American Express (AXP -0.20%) as well.
AmEx, as the company is more commonly known, has been a continuous holding in Berkshire's portfolio since 1993. With American Express closing at $185.85 last week and Berkshire sporting an average cost basis of only $8.49 a share, it means the Oracle of Omaha has gained almost 2,100%, or close to $26.9 billion. Berkshire Hathaway is also on pace to collect almost $261 million in dividend income from AmEx this year.
American Express fits right in with Buffett's theme of buying cyclical businesses that get better over time. AmEx is both a processor of credit payments and a lender. Though both segments take a hit when recessions inevitably arise, periods of economic expansion last significantly longer than contractions and recessions. Buffett has played a numbers game with AmEx that's allowed his company's initial investment to grow more than 20-fold (not counting the dividends paid).
AmEx's ability to court affluent clientele is another reason for its abundant long-term success. The well-to-do are less likely to change their spending habits during modest economic contractions. Essentially, American Express is less prone to spending fluctuations than most credit lenders.
Coca-Cola: $24.4 billion market value (7% of invested assets)
Coke is Berkshire Hathaway's longest-tenured investment. It's been a continuous holding since 1988 and has a cost basis of just $3.25 a share. With a closing price of $60.96 last weekend, it means Buffett's investment has increased more than 1,700%, with around $23.1 billion in unrealized gains, not counting dividends.
Speaking of which, Coke's $1.68 annual payout works out to a yield on cost (i.e., the annual payout relative to Berkshire's cost basis for Coca-Cola) of 52%! Buffett's company is on pace to collect $672 million in dividend income this year from Coke -- albeit this figure will likely head higher with Coca-Cola expected to increase its payout for a 60th consecutive year.
Coca-Cola's investing allure comes from its geographic diversity and brand appeal. In terms of the former, Coke sells its products in all but two countries worldwide (Cuba and North Korea). This allows it to take advantage of the steady cash flow associated with developed markets, and the growth opportunities afforded by emerging markets.
As for brand appeal, few if any consumer goods brands are better when it comes to marketing. Coke has leaned on everything from holiday tie-ins to digital marketing campaigns to bridge generational gaps and engage with consumers.
It's become one of the safest stocks to invest in on the planet.