Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.35%) CEO Warren Buffett has a knack for making money. Since taking the reins of Berkshire Hathaway in 1965, he's led the company's Class A shares (BRK.A) to an annualized return of 20.1%. In aggregate, we're talking about a greater than 3,600,000% return, through Dec. 31, 2021.
Although there are a number of factors that play an important role in the Oracle of Omaha's success, a strong case can be made that his willingness to hold onto his winners for extended periods is the foundation that Buffett's massive outperformance has been built upon.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Being patient and thinking long-term has allowed Warren Buffett and his investing team to rack up more than $171 billion in unrealized gains, not including dividends, from just four stocks.
Apple: $100.8 billion in unrealized gains (author estimate)
Every year, Warren Buffett publishes a letter to Berkshire Hathaway's shareholders that, among other things, contains the company's cost basis for its largest holdings. This often makes it easy to calculate Berkshire's unrealized gain on any of its core investment holdings.
But with Buffett's company buying approximately $600 million worth of Apple (AAPL 0.21%) during the first quarter -- and us not knowing the exact cost basis of those shares -- we're left to some guesswork. Working with the assumption that Buffett and his team acquired nearly 3.8 million shares at an average of $158 per share (around $600 million, as per Buffett's own comments) yields a cost basis of $34.77 on the more than 911 million shares of Apple Berkshire owns. Based on Apple's closing price last week of $145.38, Buffett and company are up an estimated $100.8 billion on their investment.
Apple represents the ultimate no-brainer investment for the Oracle of Omaha. It's a company with an incredibly loyal following and an easily recognizable brand. Apple has historically relied on a combination of customer loyalty and innovation to drive both sales and profits higher.
Yet what's interesting about the largest publicly traded company in the U.S. is that it's in the midst of a multiyear transition. CEO Tim Cook is overseeing a push that emphasizes subscription services. While this doesn't mean Apple is abandoning the iPhone and other bread-and-butter products that made it such a beloved company, it does demonstrate the company's evolution and understanding that services can reduce the revenue lumpiness associated with product replacement cycles.
Image source: American Express.
American Express: $24 billion in unrealized gains
Warren Buffett's second longest-held stock, American Express (AXP -0.74%), also happens to be Berkshire Hathaway's second most profitable, on a nominal, unrealized basis. The 151.6 million shares of AmEx Buffett's company owns were worth $25.3 billion, as of this past weekend. With a cost basis of $1.287 billion, this works out to a $24 billion unrealized gain.
Buffett has always been a big fan of financial stocks like American Express due to their cyclical nature. Even though recessions are inevitable, they usually last for a couple of quarters. Comparatively, periods of expansion can go on for years, if not a decade. Because American Express generates processing revenue from merchant transactions, as well as interest income and fees from its cardholders, it's able to double-dip and really take advantage of long-winded bull markets.
Another not-so-subtle secret up American Express's sleeve is its ability to court well-to-do clients. People with higher incomes are less susceptible to economic "hiccups" and more likely to continue paying their bills on time. Drawing in affluent clientele has helped AmEx navigate economic downturns better than most lenders.
I'd also be remiss if I didn't mention that AmEx's $2.08 base annual payout works out to a 24.5% annual yield relative to Berkshire's average cost of $8.49 per share.
Image source: Coca-Cola.
Coca-Cola: $23.9 billion in unrealized gains
Nipping at AmEx's heels in the nominal return department is Buffett's longest-held stock, beverage behemoth Coca-Cola (KO 0.63%). Berkshire Hathaway's 400 million shares of Coke were worth about $25.2 billion as of this past weekend, which is well above the company's $1.299 billion cost basis.
Coca-Cola may be a relatively boring company these days, but it still checks all the appropriate boxes for a Warren Buffett investment. For example, no consumer goods company has better brand recognition than Coca-Cola. According to a study conducted by Kantar, Coca-Cola was the most popular fast-moving consumer goods brand for a ninth consecutive year, as of 2020.
It's also a company with superior geographic sales diversity. Coke operates in all but three countries worldwide: Cuba, North Korea, and Russia. The latter is due to Russia's invasion of Ukraine. Having numerous successful beverage brands globally allows the company to rake in highly predictable cash flow in developed countries, while boosting its organic sales potential in faster-growing emerging markets.
Warren Buffett is a big supporter of Coca-Cola's dividend as well. Coke has increased its base annual payout in each of the past 60 years. Considering that Buffett's company has an approximate cost basis of $3.25/share on Coca-Cola, the beverage giant's $1.76 base annual payout equates to a jaw-dropping 54% annual yield on cost.
Image source: Getty Images.
Bank of America: $22.7 billion in unrealized gains
The fourth stock that's helped Warren Buffett to more than $171 billion in unrealized gains is Bank of America (BAC -1.68%). Buffett's annual letter to shareholders lists a cost basis of $14.63 billion on the more than 1.03 billion shares of BofA owned by Berkshire Hathaway. But as of this past weekend, those shares had a market value of $37.4 billion, which works out to an unrealized gain of about $22.7 billion.
Similar to the macro thesis supporting American Express, Buffett is a big believer in owning bank stocks for the long term to take advantage of the natural expansion of the U.S. and global economy. Despite inevitable short-term recessions and economic pullbacks, long-running expansions allow bank stocks like BofA to grow their outstanding loans, bring in additional deposits, and generate significant income.
Arguably the greatest aspect of Bank of America is its interest rate sensitivity. No money-center bank will see its interest income affected more by rate movements than BofA. With the Federal Reserve aggressively hiking interest rates to tame inflation, Bank of America is poised to generate billions of dollars in added net interest income over the coming quarters and years.
Bank stocks like BofA also support sizable capital return programs, when allowed by the Fed. CEO Brian Moynihan isn't afraid to boost both BofA's dividend and share buyback program to reward his company's patient shareholders. The Oracle of Omaha loves investing in companies that buy back their stock and boost dividend payments over time.
