While portfolio diversification can be a way for investors to reduce their exposure to risk, it's clear that Berkshire Hathaway CEO Warren Buffett isn't a big fan of the strategy. In fact, the Oracle of Omaha has said that "Diversification is protection against ignorance. It makes little sense if you know what you are doing."
Right now, roughly 74% of Berkshire's $366 billion stock portfolio is spread across its five largest holdings. Even more striking, its top-two largest positions account for 54.5% of the investment conglomerate's total stock holdings.
Read on to see why Buffet has bet so heavily on these two industry-leading companies.
A strong moat is something Warren Buffett always looks for
Parkev Tatevosian: As of the investment conglomerate's portfolio update on May 15, Berkshire Hathaway owns roughly $171 billion worth of Apple (AAPL 3.01%) stock. That the Oracle of Omaha's company owns so much of one individual stock might surprise some investors. However, looking at Apple's prospects for the longer term, it makes more sense.
Indeed, Apple is one of the most innovative technology companies in the world, and one of the few that have delivered decades of sustained innovation. The iPhone, Mac computers, Apple Watch, AirPods, iPods, and more have all generated billions of dollars in sales over several iterations. Over the years, Apple has earned consumer loyalty, allowing it to sell its products at premium prices.
Apple's lucrative profits demonstrate that. Apple's revenue increased from $171 billion in the previous decade to $394 billion. More impressively, its operating income soared from $49 billion to $119 billion. Given that Apple has built decades of consumer relationships and established an ecosystem that makes it inconvenient for consumers to switch to competitors, it will be challenging for anyone to encroach on its market share.
Of course, a strong competitive advantage -- or "moat", as Warren Buffet likes to call it -- is one of the primary characteristics Buffet is attracted to in an investment. After looking closely at Apple's business, it's easier to understand why Warren Buffet allocates 46.7% of his portfolio to Apple's stock.
Buffett aided this company's comeback and won big
Keith Noonan: Valued at roughly $28.7 billion, Berkshire's stake in Bank of America (BAC 0.32%) accounts for approximately 7.8% of its total stock holdings. While that comes in far below the holding company's massive position in Apple, it still stands as the investment giant's second-largest portfolio position.
| Company | Percentage of Berkshire Stock Portfolio |
|---|---|
| Apple | 46.7% |
| Bank of America | 7.8% |
| American Express | 7% |
| Coca-Cola | 6.7% |
| Chevron | 5.5% |
Data source: CNBC; Data as of June 26.
As with Apple, Berkshire once again added to its position in Bank of America stock in the first quarter. In fact, Buffett's company increased its holdings in both stocks by 2.3% in the quarter.
Given that B of A currently ranks as Berkshire's second-biggest stock holding, Buffett's company has an interesting history with the banking giant. In 2010, Berkshire Hathaway sold all of its Bank of America stock due to reduced earnings power as the company emerged from the 2008 crisis.
Struggles related to the subprime mortgage crisis continued for the bank, and Bank of America looked to be in a particularly precarious position in the leadup to the subsequent debt-ceiling crisis in 2011. Buffett then approached the bank's CEO to discuss a potential investment that would help the financial giant raise some much-needed capital.
Ultimately, Berkshire wound up investing $5 billion in Bank of America's preferred stock and received warrants to purchase 700 million shares of the company's common stock at a price of $7.14 per share. Buffett then exercised those warrants in June 2017, when the stock was trading above $24 per share.
The deal wound up being a big winner for Berkshire, and Bank of America has bounced back to become one of the strongest players in the financials sector. Even with macroeconomic pressures and stresses hitting the banking industry this year, B of A has continued to look quite solid, and actually saw an increase in deposits even as Silicon Valley Bank, Signature Bank, and First Republic Bank Folded.
Should investors follow Buffett's capital allocation strategy for Berkshire?
Apple and Bank of America are both strong companies. They've delivered impressive returns for Berkshire Hathaway, and could make worthwhile portfolio additions for other investors as well.
On the other hand, having a higher level of portfolio diversification is probably a good idea for most investors. While Berkshire's stock holdings are heavily weighted toward just a handful of stocks, the company also owns and has positions in a wide range of other subsidiary businesses, so it's actually more diversified than its heavily concentrated stock portfolio would suggest.
