Few people command the attention of Wall Street professionals and everyday investors quite like billionaire Warren Buffett. Since taking the reins of Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) in 1965, the Oracle of Omaha, as he's come to be known, has created more than $615 billion in value for shareholders and generated an aggregate return on his company's Class A shares (BRK.A) of 3,641,613%.
In other words, there's plenty of reason for Wall Street and investors to pay attention to what Buffett is buying, selling, and holding.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
While there are plenty of reasons for Warren Buffett's continued success, such as his love of dividend stocks and cyclical businesses, it's his penchant for portfolio concentration that's most interesting. According to the Oracle of Omaha, diversification is effectively "protection against ignorance." Despite Berkshire Hathaway's portfolio containing around four-dozen securities, the lion's share of its invested assets is tied up in just a few companies.
In fact, just two stocks account for 52% of Warren Buffett's $325 billion investment portfolio as of Oct. 4, 2022. Note, this includes shares held by New England Asset Management (NEAM), a specialty investment firm Berkshire Hathaway owns, which was acquired in 1998 when it purchased reinsurance company General Re.
Apple: 41.2% of invested assets
Including shares held by NEAM, Berkshire Hathaway ended the first-half of 2022 with a greater-than 915.2 million-share position in tech stock Apple (AAPL -0.57%). That's a 5.7% stake (worth $133.7 billion) in America's largest publicly traded company by market cap.
According to the Oracle of Omaha, Apple is one of Berkshire Hathaway's "four giants." By this, Buffett meant that Apple is a growth driver and/or significant valuation determinant for Berkshire Hathaway's shares and book value. Then again, that's pretty much a given when a single stock accounts for more than 41% of invested assets.
For Buffett, Apple checks all the appropriate boxes he'd like to see in a foundational holding. It has an extremely valuable and well-known brand, a very loyal customer base, and it's led with innovation. More than 15 years after the very first iPhone was released, Apple still commands about a 50% share of the U.S. smartphone market.
However, Apple's innovation extends beyond just physical products. CEO Tim Cook is spearheading a multiyear shift that's emphasizing subscription services. Not only are subscription services growing at a much faster pace than physical products, but the operating margins are considerably higher. As subscription services grow into a larger percentage of total sales, the revenue volatility associated with physical product replacement cycles should diminish.
Warren Buffett is also a huge fan of businesses that reward passive investors. Apple has repurchased close to $520 billion worth of its common stock since the beginning of 2013, and it doles out one of the largest nominal-dollar dividends on the planet (almost $14.5 billion/year).
If anything, significant declines in Apple stock might entice Warren Buffett to further increase his company's stake.
Image source: Getty Images.
Bank of America: 10.3% of invested assets
The other massive holding in Warren Buffett's investment portfolio is Bank of America (BAC 1.53%). Including the shares held by New England Asset Management, Berkshire Hathaway has a 12.9% stake totaling more than 1.03 billion shares ($33.4 billion in market value) in BofA.
Financial stocks are, without question, the Oracle of Omaha's favorite sector in which to put his company's money to work. Even though financials are cyclical and therefore subject to weakness during recessions, periods of economic expansion last substantially longer than contractions. Buying banks, insurers, payment processors, and other financial-service stocks is what allows Buffett to take advantage of the long-term expansion of the U.S. and global economy.
In Bank of America's case, the long-run expansion of the U.S. economy propels loan and deposit growth, which is the easiest way for banks to generate income.
What makes BofA a particularly interesting investment at the moment is its interest-rate sensitivity. Among money-center banks, none will see their net-interest income fluctuate more due to changes in the interest rate yield curve than Bank of America. With the U.S. inflation rate hitting a four-decade high in June and the Federal Reserve aggressively raising interest rates to tame inflation, BofA is set to enjoy a significant increase to the interest it earns from variable-rate outstanding loans.
Something else that goes unnoticed about Bank of America is the success it's had on the digitization front. Over the trailing three-year period, ended June 30, BofA has grown its active digital user count by 6 million to 43 million, as well as seen its total loan sales completed online or via mobile app jump by 19 percentage points to 48%. Online and mobile transactions cost just a fraction of what in-person and phone-based interactions do for banks. Increased digital use is what's allowed BofA to close some of its physical branches and lower its noninterest expenses.
Bank of America has a hefty capital-return program, too. Though it needs the approval of the Federal Reserve before it can return money to shareholders, it's not uncommon for BofA to return in excess of $25 billion annually via buybacks and dividends during a bull market.
The one stock Buffett has spent more money on than Apple and BofA combined
Although Apple and Bank of America combine to account for 52% of Berkshire Hathaway's $325 billion portfolio, I wouldn't go so far as to call either company Buffett's favorite stock. Based on the amount of money the Oracle of Omaha has piled into various stocks over the past decade, no stock has been a more popular buy than his own company (even if it doesn't show up in his investment portfolio).
When Warren Buffett released his annual letter to shareholders earlier this year, it noted a cost basis of approximately $31.1 billion for Apple and $14.6 billion for BofA. Taking into account additional purchases of Apple stock in both the first and second quarter of 2022, the combined cost basis for these two top holdings is probably around $47 billion. That's a lot of money to put to work in two stocks, but it's nothing compared to the $62.1 billion spent repurchasing Berkshire Hathaway Class A and Class B shares since mid-July 2018.
Four years ago, Berkshire Hathaway's board of directors altered the share-buyback criteria to give Buffett and his right-hand man Charlie Munger more freedom to go shopping. As long as Berkshire has $30 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet, and both Buffett and Munger agree that shares of the company are intrinsically cheap, buybacks can continue without a cap.
Buying back stock is a way Warren Buffett can reward Berkshire Hathaway's shareholders by making them larger owners of the company. In theory, reducing the outstanding share count makes each remaining share that much more valuable. For companies with steady or growing net income, buybacks can also lift earnings per share, which can make a company appear more fundamentally attractive to investors.
While it's clear Warren Buffett has the utmost confidence in Apple and Bank of America, it's also plainly evident that he's willing to bet on himself, his cyclically driven investment portfolio, and the roughly five-dozen businesses Berkshire has acquired over many decades. Given the Oracle of Omaha's long-term track record, this seems like a safe bet to make.
