Warren Buffett is a master investor, with the wealth and track record to prove it. He's been investing successfully for decades on his own terms, often with heavy concentrations in sectors and individual stocks.
Buffett has openly labelled diversification as a technique that's only needed by less-skilled investors. The portfolio at Berkshire Hathaway, the company Buffett runs, reflects that belief. Specifically, two sectors account for 71% of Berkshire's holdings: technology and finance.
Diversification is a risk management strategy. The goal is to avoid having all your assets move in lockstep together -- which would create extreme portfolio volatility. You might not mind upside volatility, but no one likes downside volatility.
With the possibility of a U.S. recession looming, is Buffett taking a gamble on these two sectors? Let's take a closer look.
Buffett's holdings in finance
Berkshire owns 14 financial stocks. As you can see in the table below, the top four of these financial companies comprise 23% of the overall portfolio.
|
Company Name and Ticker |
Percentage of Portfolio |
Rank in Portfolio (in Terms of Value) |
|---|---|---|
|
Bank of America (BAC 2.55%) |
11.27% |
2 |
|
American Express (AXP 2.32%) |
7.67% |
3 |
|
Moody's (MCO 1.72%) |
2.25% |
8 |
|
US Bancorp (USB 1.43%) |
1.82% |
9 |
Data source: 1Q22 13F filing.
The broader financial sector usually enjoys relatively stable demand in all types of economic climates. Some areas, like bookkeeping and tax prep services, can even get a boost in a recession.
Buffett's exposure, however, is in banks -- which have their own behaviors in down economies. Banks can do well in mild downturns, when credit card interest rates tick up and borrowing levels increase. But banks will struggle as defaults rise.
Interestingly, Buffett opened smaller positions in two banks in the first quarter -- Citigroup (C 4.47%) and Ally Financial (ALLY 3.45%), which has a consumer banking division. Buffett is not one to move in and out of a stock or sector based on short-term market conditions. So unfortunately, you can't interpret the increased banking concentration as a prediction for a softer (bank-friendly) downturn.
It's more appropriate to surmise that Buffett feels good about the longer-term prospects for these stocks. Even if a sharp recession materializes, Buffett sees these banks weathering the storm.
Buffett's holdings in technology
The table below shows Berkshire's technology stocks -- all five of them.
NASDAQ: AAPL
Key Data Points
|
Company Name and Ticker |
Percentage of Portfolio |
Rank in Portfolio (in Terms of Value) |
|---|---|---|
|
Apple (AAPL 1.45%) |
42.11% |
1 |
|
Activision (ATVI +0.00%) |
1.39% |
10 |
|
HP (HPQ +0.67%) |
1.14% |
11 |
|
Snowflake (SNOW 5.77%) |
0.38% |
25 |
|
Nu Holdings (NU 2.89%) |
0.22% |
29 |
Data source: 1Q22 13F filing.
The tech sector, like financial services, likely won't demonstrate a uniform response to recession. Mature tech companies like Apple, Microsoft, and Alphabet obviously have advantages over their smaller counterparts. Those advantages include diverse revenue streams, wide-scale brand recognition, and access to capital. These factors, along with an ongoing business push toward digitization, kept these tech stocks resilient in the brief recession of 2020.
A recession this year, though, might play out differently. Investors are already nervous about tech valuations, which has pushed share prices down this year. That negative investor sentiment could create more extreme reactions to softer-than-expected guidance or results.
Smaller tech stocks have more risk in a recession. Their less-stable business performance exacerbates the challenges of a nervous investor climate and rising interest rates.
Buffett owns a few small tech stocks, but this exposure pales in comparison to his Apple holdings. And with Apple, Buffett shows no concern. When Apple's share price dipped in the first quarter, he increased Berkshire's position by nearly 3.8 million shares.
Buffett also bought more Activision shares in the first quarter, on the news that Microsoft will purchase the video game maker.
Buffett held positions in HP, Snowflake, and Nu Holdings stable in the first quarter. Snowflake is a data warehousing company with a positive outlook for this fiscal year. Nu Holdings is a digital banking platform with about 60 million customers in South America.
Diversification and recession investing
The finance and technology sectors both have complicated histories with recession. Still, Buffett's picks in these areas are strategic. He's proven his ability to identify companies with staying power -- which, in his view, offers better protection than diversification.
Even so, most investors benefit from diversifying more than Buffett. It's too challenging to predict accurately how certain sectors or stocks will respond to constantly changing circumstances. Diversification protects you from being wrong -- which can keep you in the game to win another day.
