If you've ever wondered why Wall Street professionals and everyday investors pay such close attention to what Berkshire Hathaway (BRK.A 0.63%) (BRK.B 0.52%) CEO Warren Buffett has been buying or selling, just take a closer look at his track record. Since taking the reins in 1965, the Oracle of Omaha has led his company's Class A shares (BRK.A) to an aggregate return of 3,641,613% (through Dec. 31, 2021). That's 120 times greater than the broad-based S&P 500, including dividends, over the same period.
Warren Buffett's success has been driven by a mammoth list of factors, including his long-term mindset and attraction to dividend stocks and cyclical businesses. But perhaps tops on the list of reasons Berkshire Hathaway has outperformed is Buffett's shunning of portfolio diversification. In the Oracle of Omaha's eyes, diversification is only something investors should rely on if they don't know what they're doing.
Warren Buffett most definitely knows what he's doing -- and he has 59% of Berkshire Hathaway's $345 billion investment portfolio tied up in just three stocks.
Apple: $135.3 billion (39.2%) of invested assets
Including the assets held by Warren Buffett's secret portfolio, New England Asset Management, Berkshire's position in tech stock Apple (AAPL 0.42%) accounted for more than $135 billion of invested assets as of the end of last week. That's close to $0.40 of every $1 invested by Buffett's company tied up in Apple.
Aside from being the largest publicly traded company in the U.S., Apple offers Buffett three key selling points. First, there's the value of its brand and the customer loyalty it brings to the table. According to the Kantar BrandZ global survey released in June, Apple reclaimed the top spot as the world's most-valuable brand. The survey cited a multitude of competitive advantages, innovations, and products that resonate with consumers. For instance, the iPhone has gobbled up a little over half of all smartphone market share in the United States.
The second reason Apple makes for such a rock-solid investment is its innovation. In addition to developing smartphones, laptops, tablets, watches, and other accessories that consumers absolutely flock to, the company is in the process of shifting its operating model to focus on subscription services. Shifting to a subscription-driven platform should help minimize the revenue peaks and troughs often associated with physical product replacement cycles. Additionally, subscriptions offer higher margins and tend to improve customer loyalty.
The third reason Warren Buffett thinks fondly of Apple is its capital-return program. Although its 0.6% yield might not sound like much, Apple's nominal annual payout of $14.64 billion is one of the largest in the world.
Furthermore, since launching an aggressive share-repurchase program in 2013, the company has bought back $554 billion worth of its own stock. For context of just how massive this buyback program has been, only five S&P 500 companies not named Apple have a market cap of more than $554 billion -- and Berkshire Hathaway happens to be one of them.
Despite not being immune to cyclical slowdowns, Apple remains well positioned to thrive over the long run.
Bank of America: $37.3 billion (10.8%) of invested assets
The second stock Warren Buffett and his investment team have absolutely piled into is Bank of America (BAC -0.77%). BofA, as it's also called, accounted for close to 11% of invested assets as of last week. Keep in mind this figure also includes positions held by specialty investment firm New England Asset Management, which Berkshire Hathaway owns.
There's a very good reason financials are, arguably, Buffett's favorite sector: They're cyclical. As a long-term investor, the Oracle of Omaha is well aware that periods of economic expansion last considerably longer than downturns and recessions. Even though bank stocks like BofA do take their lumps when recessions arise, they benefit far more from disproportionately long expansions. In other words, patience pays off big time when investing in bank stocks.
This is a particularly interesting time to have $37.3 billion tied up in Bank of America. At no point in history has the Federal Reserve aggressively hiked interest rates into a plunging stock market. Although higher interest rates threaten to cool lending and slow economic activity, they should be a boon for banks that have outstanding variable-rate loans. Bank of America's net interest income jumped $2.7 billion during the third quarter from the prior-year period, and the company has estimated that a 100 basis-point parallel shift in the interest rate yield curve would bring in $4.2 billion in addition to net interest income over the next 12 months.
Bank of America's digitization push is paying off, too. The company closed out September with 43 million active digital users -- that's up 5 million from the comparable quarter in 2019 -- and saw 48% of total sales completed online or via mobile app. On top of added convenience, digital transactions cost banks just a fraction of what in-person and phone-based interactions run. As more users shift to online banking, BofA should be able to consolidate some of its branches and improve its operating efficiency.
Lastly, bank stocks have a pretty rich history of rewarding their shareholders during the good times. Including dividends and share buybacks, it's not uncommon for Bank of America to approve capital-return programs topping $20 billion per year.
Chevron: $30.7 billion (8.9%) of invested assets
The third stock that Warren Buffett made a significant portion of Berkshire Hathaway's investment portfolio is energy stock Chevron (CVX 0.94%). As of last week, Chevron accounted for close to 9% of invested assets, including the shares also held by New England Asset Management.
What's intriguing about this position is that, prior to 2022, energy stocks didn't comprise a greater than 8.9% weighting in Berkshire's portfolio this century. Now, Chevron alone comprises an 8.9% stake, with Occidental Petroleum contributing to make energy Buffett's third-largest sector by invested assets.
With roughly an eighth of his company's invested assets tied up in energy stocks, Buffett appears to be sending a very clear message that oil and natural gas prices will remain above average for some time. Even though Chevron is an integrated operator, it generates its best margins from drilling. Due to pandemic-related underinvestment from energy companies, as well as Russia's invasion of Ukraine, a challenged energy supply chain favors higher energy commodity spot prices.
Chevron is also a considerably safer bet than most oil and gas stocks. As noted, it's an integrated operator, which means that in addition to drilling and exploration, it operates midstream pipelines and downstream assets (refineries and chemical plants). Midstream providers utilize long-term, fixed-fee and volume-based contracts with drillers to produce predictable cash flow. Meanwhile, refineries and chemical plants benefit from higher demand and lower input costs when the price for crude oil falls. In short, Chevron is hedged for whatever the energy market throws its way.
It's an oil stock with a relatively pristine balance sheet, too. As of the end of the third quarter, Chevron had $8.2 billion in net debt, equating to a debt ratio of 13%. That's below virtually all major oil and gas stocks, and it affords Chevron superior financial flexibility.
Historically high energy commodity prices have also allowed Chevron to increase its dividend and enact a share-repurchase program for up to $15 billion worth of its common stock in 2022. A healthy capital-return program and industry-leading balance sheet is a recipe for a company to find itself in Buffett's good graces.