For nearly six decades, Berkshire Hathaway (BRK.A -0.81%) (BRK.B -1.17%) CEO Warren Buffett has been running circles around Wall Street. Through June 4, 2023, the Oracle of Omaha had overseen a 4,064,706% return in his company's Class A shares (BRK.A) since taking the reins.
The interesting thing about Buffett's success is that there aren't any secrets to what he's doing. The Oracle of Omaha has openly discussed how he values businesses, what attributes he and his investing team look for in a company, and how long he intends to hold the positions he and his team take.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But if there's one key ingredient to Warren Buffett's success that doesn't get enough credit, it's portfolio concentration. Both Buffett and his right-hand man Charlie Munger firmly believe that diversification is only necessary if you don't know what you're doing. This dynamic duo would much rather pile into a few really great ideas and allow their investment theses to play out over time.
This is why approximately 77% ($266.2 billion) of Warren Buffett's $347 billion portfolio at Berkshire Hathaway is invested in only five stocks.
Apple: $165.7 billion (47.7% of invested assets)
Even though Berkshire Hathaway holds stakes in roughly four dozen securities, there's no question that Warren Buffett favors portfolio concentration based on the amount of capital tied up in tech stock Apple (AAPL 0.83%). Admittedly, the Oracle of Omaha and his team have gained around 300% on their Apple stake. But with a market value of $165.7 billion, Apple is closing in on half of Berkshire's invested assets.
While having so much capital tied up in Apple might be viewed as a risk, Warren Buffett views America's largest company by market cap as Berkshire Hathaway's best business.
Apple has a phenomenal management team, led by CEO Tim Cook. In addition to maintaining its smartphone dominance in the U.S., Cook is overseeing the steady growth of Apple's services business. Shifting to a subscription-driven platform will allow Apple to improve its operating margin over time and lessen its reliance on physical products, which can undergo some pretty wild revenue swings during product replacement cycles.
Apple is also one of the most-recognized brands globally, and is frequently named as one of the world's most-valuable brands. The Oracle of Omaha is a big believer in companies that earn and retain consumers' trust.
However, Apple's capital-return program may be its crown jewel -- at least in the eyes of Buffett. Over the past decade, Apple has repurchased $586 billion worth of its common stock, which is more than the market cap of 492 of the 500 companies that make up the S&P 500.
Bank of America: $29.7 billion (8.5% of invested assets)
The second stock that makes up a significant portion of Warren Buffett's portfolio is Bank of America (BAC -0.30%). Berkshire Hathaway was given permission in August 2020 by the Federal Reserve Bank of Richmond to increase its stake in BofA up to 24.9% without being deemed a bank holding company. Buffett and his team have since upped their stake in BofA to 13%, which equates to 8.5% of Berkshire's invested assets.
The reason the Oracle of Omaha and his investing lieutenants (Ted Weschler and Todd Combs) love bank stocks is because they're long-term moneymakers. Despite being cyclical, banks benefit from periods of expansion lasting considerably longer than economic downturns. As the U.S. economy expands, so does the loan and deposit profile for banks.
What makes Bank of America such an interesting investment right now is its sensitivity to interest rates. Normally, rapidly rising interest rates and a hawkish Federal Reserve wouldn't be reason for investors to cheer. However, Bank of America is generating billions of dollars in added net-interest income each quarter thanks to the current rate-hiking cycle.
Bank of America's investments in technology are working in its favor, too. Over the trailing three-year period (ended March 31), the percentage of households banking digitally has increased five percentage points to 73%, while the percentage of loans sales completed online or via mobile app jumped 18 percentage points to 51%. Digital banking is considerably cheaper than in-person interactions, which should help improve BofA's operating efficiency.
American Express: $25.6 billion (7.4% of invested assets)
Have I mentioned that Warren Buffett favors financial stocks? Berkshire's third-largest position, credit-services provider American Express (AXP 0.05%), is a company that's been a continuous holding for the past 30 years.
The same cyclical investing premise for Bank of America holds true for AmEx. Even though consumer and business spending habits will ebb and flow with economic activity, the U.S. and global economy spend a disproportionately longer amount of time expanding than contracting. Buffett and his team know this and are simply allowing time to be their ally.
American Express enjoys the luxury of benefiting from both sides of the aisle during these long economic expansions. On top of being the third-largest payment processor in the U.S. by credit card network purchase volume, it also acts as a lender. In other words, it's collecting merchant fees and charging annual fees and/or collecting interest income from its cardholders.
If you're thinking American Express could struggle under the weight of loan losses during a recession, you'd be correct. But AmEx somewhat offsets its exposure to economic downturns through its ability to attract high earners. Individuals with high incomes are less likely to alter their spending habits or fail to pay their bills during periods of economic disruption. It means AmEx can bounce back from downturns faster than most lending institutions.
Image source: Coca-Cola.
Coca-Cola: $24.5 billion (7% of invested assets)
The fourth stock that comprises a large percentage of Warren Buffett's portfolio at Berkshire Hathaway is beverage company Coca-Cola (KO 1.08%). Coke is the only stock that's been a longer continuous holding (since 1988) than American Express.
Similar to Apple, Coca-Cola is a wholesale brand that consumers know and trust. It's quite possibly the best-known consumer goods brand on the planet.
What's helped Coca-Cola grow its brand value over time is its top-notch marketing. More than half of its advertising spend this year is going to digital campaigns, according to internal estimates from the company. Coca-Cola is also deploying artificial intelligence to create and tailor ad campaigns for younger audiences. Yet, the company can still rely on well-known brand ambassadors and its rich associations with the holidays to connect with more mature audiences.
Beyond its strong engagement trends, Coca-Cola has unsurpassed geographic diversity to rely on. It's operating in all but three countries worldwide and has 26 brands bringing home at least $1 billion in annual sales. This means Coke can count on predictable cash flow and sales in developed markets, while leaning on faster organic growth rates in emerging regions.
Coca-Cola is a rock-solid source of dividend income, too. It's raised its payout for 61 consecutive years and is yielding nearly 57% annually, relative to Berkshire Hathaway's cost basis in Coca-Cola.
Chevron: $20.7 billion (6% of invested assets)
The fifth and final stock that collectively accounts for 77% of the Oracle of Omaha's $347 billion portfolio overseen at Berkshire Hathaway is none other than energy giant Chevron (CVX 0.06%). Believe it or not, the $20.7 billion Berkshire holds in Chevron stock is down billions from where things stood just a few months prior.
Although energy stocks have never played a particularly large role in Berkshire's portfolio, a $20.7 billion position in an integrated oil and gas stock is a pretty clear indicator that Buffett, Weschler, and/or Combs expect the spot price of energy commodities to head higher.
While there are a number of probability indicators pointing to a possible U.S. recession, there are also macroeconomic factors that can buoy the spot price of oil. In particular, global energy majors reduced their capital expenditures (capex) considerably for three years during the COVID-19 pandemic. Capex is needed to maintain existing infrastructure as well as support production expansion. Less spending in this arena will make it difficult to ramp up global crude oil supply. In general, when the supply of a commodity is tight, it tends to lift the spot price of that product.
Additionally, Chevron is an integrated energy company. While it generates its best margins from drilling, Chevron also owns transmission pipelines, chemical plants, and refineries. Whereas its pipeline operations provide predictable operating cash flow in any economic environment, chemical plants and refineries act as a hedge to lower crude prices.
I'd also be remiss if I didn't mention that Chevron's board recently approved an up to $75 billion share repurchase program. Warren Buffett is a huge fan of businesses that reward long-term shareholders with dividends and share buybacks.
