Berkshire Hathaway (BRK.A -1.01%) (BRK.B -0.99%) CEO Warren Buffett has been a money machine for his shareholders since taking the reins in 1965. Through this past weekend, he's presided over a nearly 3,800,000% increase in the value of Berkshire's Class A shares (BRK.A). He's also outpaced the total return of the benchmark S&P 500, including dividends paid, by a factor of 120, as of the end of 2021.
There are a number of not-so-subtle "secrets" that explain why the Oracle of Omaha has been so successful. His love of dividend stocks and willingness to stick with his investments for years, if not decades, are perfect examples. But the unsung hero of Berkshire Hathaway's outperformance might be portfolio concentration.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett has long felt that diversification is only necessary if you don't know what you're doing. Even though Berkshire Hathaway has positions in about four dozen securities, 80% of its nearly $333 billion of invested assets are tied up in just seven stocks. Take note that the following percentages include assets held by Warren Buffett's secret portfolio, New England Asset Management.
1. Apple: 37.9% of invested assets
If there were ever any doubt that the Oracle of Omaha and his investment team prefer a concentrated portfolio, tech stock Apple (AAPL -0.24%) confirms it. Berkshire's more than $126 billion stake in Apple accounts for close to 38% of its invested assets.
Apple is special for a variety of reasons. It has an extremely loyal customer base, is producing the most-popular smartphone in the U.S., and has consistently led with its innovation for decades. Though it's not abandoning the physical products that brought it fame, Apple has shifted its focus under CEO Tim Cook to subscription services. As subscriptions grow into a larger percentage of total sales, the revenue ebbs and flows of iPhone replacement cycles should be minimized.
Apple's capital-return program is top-notch as well. The company returns $14.6 billion in dividends to shareholders each year, and it's repurchased a whopping $554 billion of its common stock over the past decade.
Rapidly rising interest rates have been a boon for banks. Effective Federal Funds Rate data by YCharts.
2. Bank of America: 10.5% of invested assets
Historically, bank stocks are Warren Buffett's favorite industry to put money to work. It's therefore no surprise that Bank of America (BAC -1.61%) comprises such a large percentage of Berkshire Hathaway's invested assets.
The reason Buffett loves bank stocks is that they're able to win a simple numbers game. Despite banks being cyclical, and therefore susceptible to weakness during inevitable recessions, economic contractions are usually short-lived. Comparatively, periods of expansion and bull markets often last for years. Lengthy periods of economic expansion allow giants like Bank of America to grow their loans and deposits and return a sizable portion of their net income to shareholders in the form of dividends and buybacks.
The other interesting thing about BofA is that it's the most interest-sensitive money-center bank. As interest rates have risen, Bank of America has seen its net interest income jump by billions of dollars each quarter.
3. Chevron: 9.2% of invested assets
Over the past two years, energy stock Chevron (CVX -0.09%) has grown into a top-three position in Berkshire Hathaway's portfolio.
The likeliest reason for Buffett and his investing lieutenants (Todd Combs and Ted Weschler) to pile into Chevron is the expectation that the spot prices for crude oil and natural gas will remain high. Though a lot of attention has been afforded to Russia's invasion of Ukraine and the supply disruptions to Europe created by this event, the COVID-19 pandemic has provided even more of a lift for oil and gas prices. With global energy companies cutting their capital expenditures due to pandemic-related demand uncertainty, it'll be years before global oil and gas supply can be meaningfully increased. That's good news for Chevron's drilling operations.
However, Chevron is also an integrated operator. In addition to drilling, it also operates transmission pipelines, refineries, and chemical plants. These are assets that can hedge against oil and natural gas price weakness.
Image source: Coca-Cola.
4. Coca-Cola: 7.2% of invested assets
No stock in Berkshire Hathaway's investment portfolio has been a longer continuous holding than beverage company Coca-Cola (KO 0.65%). Buffett and his team have likely stuck with Coca-Cola for 35 years for two specific reasons.
To begin with, Coke offers incredible geographic diversity. Except for Cuba, North Korea, and Russia, you'll find this company operating in every other country worldwide. This means taking advantage of faster growth rates in underpenetrated emerging markets, as well as raking in dependable cash flow in developed markets.
The other key to success for Coca-Cola is its marketing. It's arguably the most-recognized consumer goods brand in the world. This is a company that's been able to use everything from its holiday tie-ins to its social media brand ambassadors to transcend generational gaps and connect with consumers young and old.
5. American Express: 6.9% of invested assets
In case the point hasn't been driven home yet, Warren Buffett really enjoys putting Berkshire Hathaway's money to work in financial stocks. Credit-services company American Express (AXP -1.36%) certainly fits the bill -- and is Berkshire's second longest-held stock (since 1993).
Similar to Bank of America, AmEx benefits from disproportionately long periods of expansion. But it's the company's ability to double-dip that really stands out. In addition to collecting fees as a payment processor, American Express also lends money and collects fees and/or interest from its cardholders. While lending exposes the company to potential loan losses during recessions, it allows American Express to double down during the good times.
AmEx has also done a phenomenal job of courting high-income cardholders. High earners are less likely than the typical worker/consumer to be impacted by above-average inflation or a modest recession. This adds predictability to AmEx's operating results.
WTI Crude Oil Spot Price data by YCharts.
6. Occidental Petroleum: 3.9% of invested assets
Perhaps the most eyebrow-raising thing about Occidental Petroleum (OXY -0.25%) being Berkshire Hathaway's sixth-largest holding is that the entirety of this position was added last year. However, I'll also note that Berkshire has been holding $10 billion in Occidental preferred stock (yielding 8%) since 2019.
The bull thesis behind Occidental is very similar to Chevron, but it does have its own nuances. For example, even though Occidental is an integrated operator with downstream assets, a larger percentage of its revenue is tied to drilling assets than Chevron. In other words, holding Occidental Petroleum stock may allow Buffett's company even more leverage if the price of crude oil stays elevated.
The other key difference between Berkshire Hathaway's two large energy positions is their balance sheets. Chevron has what's arguably the best balance sheet among big oil companies. Meanwhile, Occidental has been mired in debt following its Anadarko acquisition in 2019. Buffett and his team may well have a bargain if Occidental can continue to dig itself out of the hole it's created. However, oil prices will need to remain elevated for that to happen.
7. Kraft Heinz: 3.9% of invested assets
Lastly, consumer staples stock Kraft Heinz (KHC -0.93%) accounts for 3.9% of Berkshire Hathaway's invested assets. Altogether, these seven stocks round up to 80% of the assets in Warren Buffett's portfolio.
Consumer staples stocks like Kraft Heinz tend to be attractive during periods of heightened uncertainty, such as what we're experiencing now. This is a company with more than a dozen well-recognized brands and generally strong pricing power. Since food is a basic necessity, the expectation is for predictable operating cash flow from Kraft Heinz.
But as I recently opined, Kraft Heinz is quite possibly Warren Buffett's worst investment. The company's balance sheet is weighed down by large amounts of long-term debt and goodwill, which leaves it little financial flexibility. If the U.S. were to enter a recession in 2023, it's not out of the question that consumers trade down from Kraft Heinz to less-costly store brands to save money.
