When it comes to building wealth, Berkshire Hathaway (BRK.A -0.87%) (BRK.B -0.86%) CEO Warren Buffett deserves to be in a class of his own. Although the Oracle of Omaha, as he's come to be known, isn't the wealthiest individual on the planet, he's delivered some of the most eye-popping investment returns over the past six decades.
Since becoming CEO of Berkshire Hathaway in 1965, Buffett has overseen the creation of more than $760 billion in value for shareholders (himself included) and generated an average annual return of better than 20% on his company's stock. In aggregate, Berkshire Hathaway's Class A shares (BRK.A) have gained 4,200,965% since the beginning of 1965.
With such an incredible track record, it's no surprise that Wall Street and investors tend to ride Buffett's coattails to big gains. That's why Berkshire's Form 13F filings with the Securities and Exchange Commission, which disclose the company's buying and selling activity each quarter, are so closely monitored.
Buffett has spent a small fortune buying shares of Apple and Bank of America
A brief look at Berkshire's 13F filings over roughly the past decade would lead you to one conclusion: Tech kingpin Apple (AAPL 0.49%) and money-center banking-giant Bank of America (BAC -1.46%) are his favorite stocks.
Warren Buffett and his investing team began buying shares of Apple in 2016. Even after very modestly paring this stake, Berkshire Hathaway still owns more than 907 million shares of Apple, valued at almost $150 billion. The initial cost of this remaining stake is $31.1 billion, which equates to more than 30% of the cost basis of Berkshire Hathaway's entire investment portfolio.
Buffett noted in the company's annual report to shareholders that Apple is one of four "giants" that substantially account for Berkshire Hathaway's value. Apple has the leading share of the smartphone market in the U.S., as well as a rapidly growing subscription-services segment, so it's hard to argue against the Oracle of Omaha's assessment.
There's also Bank of America, which is the clear No. 2 holding for Berkshire Hathaway and accounts for close to 12% of the value of its investment portfolio. Berkshire Hathaway's cost basis for its more than 1 billion shares of BofA is about $14.6 billion, which means it's sitting on an unrealized gain of almost $26 billion.
Buffett is a big fan of bank stocks, given their cyclical nature. What makes Bank of America so special is its interest-rate sensitivity. No big bank is more sensitive to parallel moves in the interest-rate yield curve. With the Federal Reserve set to hike interest rates multiple times this year, BofA appears set to enjoy a surge in net interest income.
Surprise: The Oracle of Omaha has spent far more acquiring shares of this stock
On a combined basis, Buffett and his investing team have spent $45.7 billion purchasing shares of Apple and Bank of America. That's about 44% of the overall cost basis of Berkshire Hathaway's investment portfolio. But if an investors' faith in a company is measured by their willingness to put their money to work in it, neither Apple nor BofA is Buffett's favorite stock. Rather, that honor belongs to (climactic drum roll)... Berkshire Hathaway.
Prior to July 2018, Warren Buffett and his right-hand man Charlie Munger only had the option of repurchasing shares of Berkshire stock if those shares traded at or below 120% of book value (i.e., a 20% or lower premium to book value). Unfortunately for this dynamic duo, Berkshire Hathaway's shares didn't dip below this 120% threshold, which meant no share buybacks could be enacted.
But things changed on July 17, 2018. On this date, the Berkshire Hathaway board of directors passed new measures that allowed Buffett and Munger to repurchase shares of the company if two conditions were met. First, the company had to have at least $20 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet. And second, Buffett and Munger had to agree that Berkshire Hathaway is trading below its intrinsic value. With these two conditions met, share buybacks could be made without any set limit.
In the third quarter of 2018, Buffett and Munger began aggressively repurchasing shares of their own company. Over a 3.5-year stretch, these buybacks have totaled $58 billion! For context, that's over half the cost basis of Berkshire Hathaway's entire investment portfolio.
Warren Buffett's favorite company is clearly his own
Why repurchase $58 billion worth of common stock? The most-obvious answer is that Warren Buffett views his own company as the best value on Wall Street. Reducing Berkshire Hathaway's outstanding share count can also boost earnings per share over time and make the company appear more fundamentally attractive.
But there are likely other reasons Warren Buffett views Berkshire Hathaway as such an amazing value. For instance, the Oracle of Omaha has set his company up to benefit from long-winded expansions in the U.S. and global economy. Even though recessions and growth slowdowns are an inevitable part of the economic cycle, Buffett is keenly aware that periods of expansion last significantly longer than the average recession. Packing Berkshire Hathaway's investment portfolio with cyclical companies and simply being patient has been a moneymaking strategy for close to six decades.
Berkshire Hathaway has turned into a dividend-income juggernaut, too. Buffett's company is on pace to collect well over $5 billion in dividend payouts this year, with more than $4 billion of this income originating from just six holdings. Buying and holding high-quality companies for long periods of time has resulted in a mountain of passive income.
Admittedly, it wouldn't be a surprise to see buyback activity taper a bit in 2022, given that shares are now at 152% of book value (as of April 18, 2022). That's on the higher side of where they've traded over the past decade. However, with Berkshire Hathaway's book value steadily rising over time, ongoing buyback activity should be expected.