Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) CEO Warren Buffett knows a thing or two about investing -- at least according to his track record. Since taking over as CEO in 1965, he's overseen a greater than 3,700,000% aggregate return in his company's Class A shares (BRK.A). Hypothetically, these shares could lose 99% of their value tomorrow and Buffett's company would still be handily outpacing the benchmark S&P 500's total return, including dividends paid, since 1965.
The Oracle of Omaha's long-term success has encouraged investors young and old to ride his coattails. This can be done relatively easily by tracking Berkshire Hathaway's trading activity via Form 13F filings with the Securities and Exchange Commission.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
A 13F is a required quarterly filing for institutional investors with at least $100 million in assets under management. It allows investors an under-the-hood look at what stocks, trends, industries, and sectors are intriguing the brightest and most-successful fund managers on Wall Street. But in Buffett's case, Berkshire Hathaway's 13F doesn't tell the complete story.
In 1998, Buffett's company acquired reinsurance giant General Re for $22 billion. At the time, General Re owned a specialty investment firm known as New England Asset Management (NEAM). When Berkshire Hathaway bought General Re, NEAM came with it and effectively became Warren Buffett's secret portfolio. Although Buffett doesn't oversee NEAM's investment activity as he does with Berkshire's $331 billion portfolio, what New England Asset Management holds stakes in is, effectively, owned by Buffett's company.
Since New England Asset Management has more than $5.4 billion in assets under management, it's required to file a quarterly 13F. What this latest filing showed is that Warren Buffett's secret portfolio is highly concentrated, with 86% of invested assets tied up in only four stocks (as of Dec. 31, 2022).
Apple: 48.92% of invested assets
Similar to Berkshire Hathaway's core investment portfolio, tech stock Apple (AAPL 0.64%) makes up the largest position. Whereas it accounts for 41% of invested assets in Berkshire's $331 billion investment portfolio, it comprises nearly 49% of Buffett's secret portfolio.
Apple has been a continuous holding for New England Asset Management for the past 10 years. The reasons it accounts for almost half of invested assets probably has to do with its innovation and capital-return program.
In one respect, Apple's physical products have endeared hundreds of millions of people worldwide to its brand. Following the launch of 5G-capable iPhones in the U.S. a little over two years ago, Apple's share of the smartphone market rocketed higher and settled around the 50% mark.
However, Apple's future depends just as much, if not more, on its evolution as a services-oriented company. CEO Tim Cook and his management team are spearheading a transition that focuses on high-margin subscription services. As services grows into a larger percentage of net sales, the ebbs and flows Apple would experience from physical product replacement cycles should be minimized.
Apple is also a cash-flow powerhouse. It's generated more than $109 billion in operating cash flow over the trailing four quarters, is returning close to $14.6 billion to its shareholders each year via dividends, and has repurchased more than $550 billion of its common stock over the past decade.
Image source: Getty Images.
Chevron: 14.64% of invested assets
Energy stock Chevron (CVX 0.57%) has been an especially popular buy in Warren Buffett's secret portfolio. The oil and gas giant is closing in on a 15% share of invested assets and has been a continuous holding by NEAM for more than two decades.
The most logical reason for New England Asset Management to have nearly $800 million put to work in Chevron stock would be the expectation of elevated energy commodity prices. Although the spot price of natural gas has absolutely nosedived due to a warmer winter in parts of the U.S. and Europe, crude oil has held up quite well.
The thesis behind higher crude oil prices relates to Russia's invasion of Ukraine and the COVID-19 pandemic. While a lot of emphasis has been placed on Europe's energy demand needs following Russia's invasion of Ukraine, three years of capital underinvestment because of the pandemic is, arguably, a bigger issue. Increasing the global supply of oil will take time, which in the interim is helping to buoy the spot price of West Texas Intermediate and Brent crude.
It's worth pointing out that Chevron is an integrated operator. Though it generates its best margins from drilling, it also operates transmission pipelines, chemical plants, and refineries. These are segments that provide predictable cash flow and/or help to hedge against weaker crude oil prices.
Furthermore, Chevron capital-return program is pretty special. It recently raised its base annual payout for a 36th consecutive year and announced a share repurchase program that could total as much as $75 billion.
Bank of America: 13.88% of invested assets
Keeping with the similarities to Berkshire Hathaway's $331 billion investment portfolio, Buffett's secret portfolio is fairly heavily weighted to Bank of America (BAC 1.70%). Money-center bank BofA has been a continuous holding for NEAM since the third quarter of 2017.
The attractiveness of bank stocks has to do with the predictability of the U.S. and global economy over time. Even though banks are cyclical and recessions are an inevitable part of the economic cycle, the U.S. and global economy tend to grow over long periods. With time as an ally, companies like Bank of America can focus on growing their loans and deposits and generate higher net income as the U.S. economy expands.
The most intriguing aspect about BofA is its interest rate sensitivity. With the Federal Reserve combatting historically high inflation by rapidly increasing interest rates, banks with outstanding variable-rate loans have seen their net-interest income rise. However, no bank is seeing a larger bump in net interest income than Bank of America, which recognized a $3.3 billion increase from the year-ago period during the fourth quarter.
Bank of America also deserves recognition for its aggressive investments in digitization. As of the end of 2022, 44 million people were active digital users -- that's up 6 million from three years earlier -- and 49% of total sales were completed online or via mobile app. It's much cheaper for banks when customers transact digitally, and it's allowing BofA the option to consolidate some of its physical branches to reduce its operating expenses.
HP: 8.15% of invested assets
The fourth stock in Warren Buffett's secret portfolio that makes up a significant percentage of invested assets is personal-computing (PC) and printing-solutions company HP (HPQ -0.11%). Despite accounting for more than 8% of New England Asset Management's invested assets, it's been a holding for less than two years.
One of the lures of HP is that its operating model tends to be predictable. Putting aside the fact that PC sales surged during the pandemic and are now falling back to normalized levels, HP can generally count on predictable sales and cash flow from PCs and printing solutions each year.
To add to the above predictability, HP is also a value stock. During bear markets, investors tend to seek out highly profitable, time-tested businesses with relatively low price-to-earnings multiples. Even though HP's growth heyday is long gone, there's (presumably) a pretty safe floor beneath a company's stock that's valued at just 8 times forecast earnings in 2024.
Similar to the other companies on this list, HP has beefed up its capital-return program as a way to reward its long-term shareholders. HP used $4.3 billion of its cash during fiscal 2022 to repurchase 126 million shares of its common stock. It recently announced a 5% increase to its quarterly dividend as well.
While HP is far from an exciting investment, it provides stability at a time when the stock market can be whipsawed at a moment's notice.
