Many may have thought that Warren Buffett is, at age 91, a bit past his investing prime. And for a while, the numbers suggested that perhaps he was.
Since the 2008-2009 financial crisis, technology stocks have accounted for a larger and larger share of the value of the S&P 500. Today's biggest companies are no longer in the industrial, consumer staples, or energy sectors, but rather, tech stocks like Apple (AAPL 0.30%), Microsoft, and Alphabet. Buffett-led Berkshire Hathaway (BRK.A -1.78%) (BRK.B -1.89%) began buying Apple in 2016. But aside from that, his strategy has remained largely focused outside of the tech sector and other growth areas.
Here's why the Buffett-picked portfolio's relative lack of tech stocks hasn't hurt its performance, and why Berkshire stock is up 19% so far in 2022 with the S&P still down on the year.
Going with your best ideas
Berkshire Hathaway holds stakes in more than 50 companies, and the conglomerate owns dozens of businesses outright. But in reality, most of the value in its stock portfolio is concentrated in a few large holdings.
For example, Berkshire's top five stock holdings -- Apple, Bank of America (BAC -0.65%), American Express (AXP -0.69%), Coca-Cola (KO 0.30%), and Kraft-Heinz (KHC -0.33%) -- make up 76% of the total equity portfolio. And the top three holdings alone make up 66% of its value.
Berkshire first started buying Apple on May 16, 2016. Since then, Apple, Bank of America, and American Express have all beaten both the Nasdaq Composite and the S&P 500.
When an investor has that much weighting in three market outperformers and their best pick is up seven-fold in under six years, it's hard not to beat the market. So, while Buffett has stayed mostly outside of tech, the main tech stock Berkshire picked has been a huge winner, and the two largest financial stocks it owns have also been big-time winners.
Aside from the public equities side of the business, the conglomerate also operates incredibly profitable insurance businesses, railroads, energy and utility companies, manufacturing companies, service and retail companies, and more. These businesses produce earnings for Berkshire Hathaway on top of the gains made by the investment portfolio.
It also owns a ton of assets. Looking at Berkshire Hathaway's 2021 annual 10-K filing, we can see that the business finished the year with $350.7 billion in investments in equity securities, but $958.8 billion in total assets once you factor in its $176.4 billion in property, plants and equipment, cash, inventories, and other assets.
Gains from investments made up 69% of 2021 net earnings while the business units produced the remaining 31%. In other words, Berkshire Hathaway is much more than the public securities that it owns.
A resurgence in value investing
The third reason why Buffett is crushing the market in 2022 is that there's been a pronounced shift in the market away from growth stocks and toward value stocks. It started in 2021 when investors began selling hyper-growth stocks and pandemic winners and moving money into more profitable stocks on the growth side of the market. But in 2022, even those big-name growth stocks, such as Netflix and Meta Platforms, have fallen sharply from their highs, prompting a further shift toward true value stocks.
That marketwide move from growth toward value plays to Buffett's strengths. And there are many reasons why the shift can be good for individual investors too.
A healthy market
Investing in value stocks makes more sense for folks who don't want to overpay for companies, who want to generate passive income, or are more focused on not losing money than on making a lot of money. A lot of traders got in trouble over the last couple of years by piling into meme stocks, altcoins, SPACs, and other hyper-growth stocks that were not being valued based on their fundamentals. Dangerous investment styles may be tempting when they appear to be working -- and gambling in risky stocks, businesses with unproven models, and other speculative assets can work for a time. But over the long term, it isn't a sound investing style.
I think many investors would agree that they'd rather have a stock market led by quality businesses than a market led by speculation and greed. The shift back to value is refreshing, and could also be a good opportunity for you to add a few top Buffett stocks to your diversified portfolio.