If you've ever wondered why Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%) CEO Warren Buffett is so revered on Wall Street, just take a closer look at his track record.
Though the Oracle of Omaha, as he's come to be known, is fallible just like every other investor on the planet, he's been able to double up the annualized total return, including dividends, of the benchmark S&P 500 since 1965. On an aggregate basis, Berkshire's Class A shares (BRK.A) have gained 4,455,573% under Buffett's watch, through the closing bell on Sept. 9, 2023.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett's formula for success involves no fancy charting software or algorithms. Rather, he seeks out well-run, profitable businesses with sustainable moats/competitive advantages, and he hangs onto these investments for years, if not decades.
But perhaps most important in Warren Buffett's moneymaking recipe is his penchant for portfolio concentration. Even though Berkshire Hathaway holds stakes in more than 50 securities, a little over 61% ($216.3 billion) of the $353.3 billion portfolio Buffett and his team oversee is invested in just three stocks.
Apple: $163,134,548,865 market value (46.2% of invested assets)
The Oracle of Omaha has long held the belief that his and his investment teams' top ideas should account for a significant portion of Berkshire Hathaway's invested assets. It's pretty apparent that no investment idea ranks higher than tech stock Apple (AAPL 0.02%). As of the closing bell on Sept. 8, 2023, it accounted for more than 46% of Berkshire's investment portfolio.
During his company's annual shareholder meeting in May 2023, Buffett described Apple as "a better business than any we own." It's a strong statement considering that Berkshire Hathaway outright owns railroad BNSF and insurance company GEICO, among roughly five dozen other businesses.
One reason Buffett likely feels this way is the loyalty of Apple's customer base. Apple is often viewed as one of the most valuable and most recognized brands in the world. When new products hit retail stores, it typically doesn't have to worry about demand.
In terms of moat, Apple has pretty consistently led the way in U.S. smartphone sales. Since a 5G-capable version of its iPhone hit sales floors during the fourth quarter of 2020, Apple has accounted for around a 50% (if not greater) share of the U.S. smartphone market.
Apple's ability to evolve as a company has to be pleasing the Oracle of Omaha as well. CEO Tim Cook is spearheading a multiyear shift that's refocused Apple on subscription services. Though it's not abandoning the physical products that endeared the company to consumers, it is evolving into a platforms company. Emphasizing subscription services should be a positive for the company's operating margin, and it can help smooth out the revenue lumpiness often observed during iPhone replacement cycles.
But it might be Apple's capital-return program that has Warren Buffett hooked. Apple is paying one of the largest nominal-dollar dividends each year ($15 billion), and it's repurchased around $600 billion worth of its common stock since it kicked off its buyback program in 2013. Berkshire's stake in Apple is steadily climbing as a result of Apple's mammoth buybacks.
Bank of America: $29,291,682,890 market value (8.3% of invested assets)
Although it sits a veritable mile behind top-holding Apple, there's no doubt that Bank of America (BAC 0.18%) (commonly known as "BofA") is a favorite of Warren Buffett and his investing team. Berkshire holds more than 1 billion shares of BofA stock, which equates to a market value of almost $29.3 billion as of Sept. 8.
Interestingly enough, the Oracle of Omaha appears to favor bank stocks because they're cyclical. Though banks tend to struggle with rising loan losses and credit charge-offs during recessions, the fact is that recessions don't last very long. Since World War II ended, all 12 U.S. recessions have lasted just two to 18 months.
In comparison, economic expansions usually last multiple years, if not a full decade. Rather than foolishly trying to time when economic downturns will occur, Buffett buys financial stocks (with an emphasis on banks) to take advantage of the natural growth of the U.S. economy over long periods.
Perhaps the greatest lure for Buffett with Bank of America is its interest-rate sensitivity. In general, most bank stocks are going to benefit from a rising-rate environment. Banks with outstanding variable-rate loans should see their net-interest income climb in lockstep with interest rates. BofA just happens to be the most sensitive of the big banks when it comes to interest rate movements. The most aggressive rate-hiking cycle in four decades has added billions of dollars in net-interest income to BofA's coffers each quarter. Best of all, the Fed doesn't appear as if it'll be easing its federal funds target rate anytime soon.
As I've stated previously, Bank of America's investments in technology are also paying off. While it's never going to be considered a cutting-edge financial company, BofA's digitization efforts have led to a more-than-doubling in Zelle transactions since June 2020 (79 million in Q2 2020 vs. 197 million in Q2 2023), as well as a 74% household digital banking adoption rate. Online and mobile transactions are considerably cheaper for Bank of America than in-person interactions. In other words, the company's technological investments should improve its operating efficiency.
Image source: American Express.
American Express: $23,868,072,501 (6.8% of invested assets)
The third stock that makes up just over 61% of Warren Buffett's $353 billion portfolio, when aggregated with Apple and Bank of America, is credit-services provider American Express (AXP 0.62%). AmEx, as American Express is also known, is the second-longest tenured holding in Berkshire Hathaway's portfolio (since 1993).
The macrothesis with American Express is very similar to BofA. While recessions and contractions are a normal part of the economic cycle, expansions and bull markets last disproportionately longer. For a long-term-minded investor like Buffett, it's a simple numbers game that works to his advantage.
Two factors have made AmEx an undeniable winner over the long run: its ability to play both sides of the aisle during a transaction and the type of customer it tends to court.
As of 2021, American Express securely held the No. 3 spot in the U.S. with regard to credit card network purchase volume. Being responsible for nearly 20% of all credit card network purchase volume in the No. 1 market for consumption globally is an envious position to be in.
But in addition to collecting fees from merchants, American Express also acts as a lender to consumers and businesses. While this does expose AmEx to potential loan losses and credit delinquencies during downturns, AmEx benefits as a whole because periods of expansion last substantially longer. Being able to "double-dip" and hit both sides of a transaction has really lifted AmEx's ceiling.
Furthermore, American Express has a lengthy history of attracting affluent clientele. High-earning cardholders are less likely to alter their spending habits or fail to pay their bill during modest disruptions in the U.S. and global economy. In theory, this should allow AmEx to weather downturns better than most lending institutions.
