For 58 years, Berkshire Hathaway (BRK.A -0.59%) (BRK.B -0.75%) CEO Warren Buffett has been dazzling Wall Street with his investing prowess. Although he can be wrong just like any other investor, he's managed to lap the total return of the S&P 500, including dividends paid, 153 times. Put another way, Berkshire's stock could drop 99% and Buffett's company would still be comfortably outperforming the broader market over a nearly six-decade stretch.
There are a number of reasons the Oracle of Omaha has vastly outperformed the benchmark S&P 500. Examples include using time as an ally, packing Berkshire's portfolio with cyclical, dividend-paying companies, and focusing on sectors and industries Buffett and his team know well.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But among the many factors that have helped Berkshire Hathaway succeed, portfolio concentration has played a crucial role. By concentrating a sizable percentage of Berkshire's portfolio in a handful of companies, Warren Buffett has been able to deliver outsized gains to his shareholders.
Based on a combination of reported and estimated cost basis data, Warren Buffett is currently sitting on over $177 billion in unrealized gains from only four stocks, not including dividends.
Apple: $116.69 billion in gains (author estimate)
This probably comes as no surprise to anyone who follows the Oracle of Omaha's buying and selling activity, but Buffett and his investing lieutenants, Ted Weschler and Todd Combs, are sitting on well over $116 billion in unrealized gains from tech stock Apple (AAPL 0.19%). You'll note this figure is estimated, which is due to the fact that neither Buffett's letter to shareholders, nor the company's operating results, updated the cost basis on Apple following the purchase of shares in 2022.
If you're wondering why Buffett has over 44% of Berkshire Hathaway's invested assets in Apple, it boils down to branding, management, and the company's capital-return program. In terms of the former, Apple is a globally well-recognized brand with an exceptionally loyal customer base. Buffett tends to gravitate to businesses that consumers trust.
Speaking of trust, it's pretty evident that Berkshire's investment team is pleased with Apple CEO Tim Cook. On top of maintaining Apple's leading status in the U.S. smartphone market, Cook is spearheading a multiyear transition that emphasizes subscription services. This natural evolution for Apple is expected to increase the company's operating margin and help buffer sales during physical product replacement cycles.
But let's be honest, Buffett is probably enamored with Apple's capital-return program. Apple is doling out almost $14.6 billion annually in dividends to its shareholders and has repurchased in excess of $550 billion worth of its common stock since 2013 began. The easiest way for businesses to get in Buffett's good graces is to increase Berkshire Hathaway's ownership stake via buybacks.
Coca-Cola: $23.84 billion in gains
With time as an ally, beverage stock Coca-Cola (KO 0.65%) has helped Buffett's company generate close to $24 billion in unrealized gains, not including dividends. Coca-Cola is Berkshire Hathaway's longest continuously held stock (since 1988).
The beauty of consumer staples stocks is that they're often incredibly safe. No matter how well or poorly the U.S. economy performs, there are certain things people still need to buy, such as food, beverages, detergent, toothpaste, toilet paper, and so on. As a beverage provider, Coca-Cola fits in this nondiscretionary niche, which has allowed it to deliver big returns for Berkshire Hathaway.
On a more company-specific level, Coca-Cola benefits from its practically unsurpassed geographic diversity. With the exception of Cuba, North Korea, and Russia, it has ongoing operations in every other country worldwide. This means it's generating relatively predictable cash flow in developed markets, while buoying its organic growth rate developing and emerging markets.
What's more, few companies have done a better job of connecting with and engaging consumers of all ages than Coca-Cola. Whether it's utilizing social media to increase brand awareness and introduce new products, or relying on the holidays to connect with its more mature consumers, Coca-Cola's ability to engage is, arguably, tops among consumer goods brands.
Image source: American Express.
American Express: $22.79 billion in gains
A third stock that's made Warren Buffett and Berkshire Hathaway's shareholders a fortune is credit-services provider American Express (AXP -1.23%). With a cost basis of $1.287 billion, American Express's current value of almost $24.1 billion in Berkshire's portfolio equates to a $22.79 billion gain on investment (not counting dividends).
Out of the 11 sectors Warren Buffett can choose to invest in, financials are, undeniably, his favorite. Even though Apple is Berkshire's largest holding, there's no sector he has a better fundamental grasp on than financials. That helps explain why AmEx has been a continuous holding of Buffett's for 30 years -- and counting.
The top reason to own shares of American Express is its ability to play from both sides of the aisle. In addition to being the third-largest payment processor in the U.S. by credit card network purchase volume, it's also a lender. It charges annual fees and/or interest to its cardholders. Being able to double-dip like this can be particularly profitable during long periods of U.S. and global economic expansion.
But there's another reason AmEx has fared so well over the long run: its affluent clientele. This is a company that has a knack for attracting high earners. The advantage of having high earners and high-net-worth cardholders is that they're less likely to alter their purchasing habits or fail to make their payments if a recession arises or inflation picks up. Targeting a more affluent clientele affords AmEx some level of downside protection that most lenders don't have.
Bank of America: $14.12 billion in gains
The fourth stock that's collectively helped Warren Buffett to more than $177 billion in gains over his company's cost basis is Bank of America (BAC -1.47%). Including shares held by Buffett's secret portfolio, New England Asset Management, Berkshire Hathaway is currently up over $14.1 billion on its BofA stake.
The promise and peril of bank stocks is one and the same: they're cyclical. Although being cyclical exposes bank stocks to possible credit delinquencies and loan losses during recessions, downturns in the U.S. economy don't last very long. Every recession after World War II has lasted just two to 18 months. By comparison, economic expansions have typically been measured in years. Buffett and his team buy bank stocks like BofA to take advantage of this cyclical numbers game over the long term.
What makes Bank of America such an interesting investment among bank stocks is its sensitivity to interest rate movements. Between the end of 2021 and the close of 2022, the company's reported net interest yield rose from 1.67% to 2.22%, all thanks to the Fed rapidly increasing interest rates to tame inflation. For BofA, the result was an increase in net interest income from $11.4 billion in the fourth quarter of 2021, based on generally accepted accounting principles (GAAP), to a GAAP profit of $14.7 billion in Q4 2022. No large bank is reaping the rewards of higher interest rates more than BofA.
Bank of America has also made big strides with its technology investments. It now has 44 million active digital users and closed out 2022 with 49% of its loan sales being completed online or via mobile app. With digital sales costing just a fraction of what in-person interactions run for banks, we're seeing BofA's technology investments pay off in the form of improved operating efficiency.
