In 1996, Warren Buffett shared his thoughts on portfolio diversification at Berkshire Hathaway's annual meeting. He said: "Diversification is a protection against ignorance," and it makes very little sense for anyone who knows what they're doing.
Readers should not misinterpret that sentiment. Buffett is saying diversification for the sake of diversification is pointless. Rather than arbitrarily spreading capital across different companies and sectors, investors should buy into quality businesses within their circle of competence, and then patiently hold those stocks for as long as their investment thesis remains intact.
Berkshire practices that philosophy and, as a result, its stock portfolio leans very heavily toward one specific market sector (and one specific stock). Here are the details.
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Berkshire Hathaway is betting big on the technology sector
Berkshire's stock portfolio was worth $353.4 billion at the end of June, an impressive figure given its cost basis of $115.7 billion. That colossal sum was spread across 48 stocks in eight different market sectors, but 53% was allocated to a single sector: information technology.
Berkshire's complete sector allocation is detailed below:
- Information technology: 53.02%
- Finance: 21.63%
- Consumer staples: 10.95%
- Energy: 9.35%
- Communications: 2.43%
- Healthcare: 1.06%
- Consumer discretionary: 1.02%
- Materials: 0.33%
That Berkshire is so exposed to the technology sector may shock some investors. Warren Buffett has generally avoided technology stocks because they exist beyond his circle of competence, meaning he does not understand the space well enough to make informed decisions. But the most stunning detail is that Berkshire finished the June quarter with $177.6 billion (50% of its portfolio) invested in one specific technology stock: Apple.
That represents a stunning reversal from something Buffett said in 2012. When asked for his opinion on Apple and Google parent Alphabet, Buffett said: "I would not be surprised to see them be worth a lot more money 10 years from now, but I would not buy either one of them." So, the general consensus is that another Berkshire investment manager (i.e., Ted Weschler or Todd Combs) actually bought Apple, though Buffett has undoubtedly familiarized himself with the business since then.
For the sake of accuracy, Berkshire also had small positions in five other technology stocks when the June quarter ended: video game publisher Activision Blizzard, computing company HP, fintech StoneCo, data specialist Snowflake, and digital banking platform Nu Holdings.
What can investors learn from Berkshire's asset allocation
Berkshire Hathaway made its first investment in Apple in the first quarter of 2016, a meager $1 billion position that represented less than 1% of its portfolio. At the time, I doubt Buffett or his fellow investment managers had any idea it would one day become Berkshire's largest position.
So what happened? Apple stock returned a total of 675% between Q1 2016 and Q2 2023, and Berkshire periodically added to its position along the way, buying shares most recently in Q1 2023. That combination took Apple from less than 1% of its portfolio in Q1 2016 to 50% in Q2 2023, while pushing its technology sector exposure from 10% to 53% over the same period.
AAPL Total Return Level data by YCharts. Note: Chart shows Apple total returns between Q1 2016 and Q2 2023.
Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." Clearly, he still sees Apple as a good company. In fact, Buffett recently said it was a better company than any of the others Berkshire owns. That explains why Berkshire has never sold a single share of Apple stock despite the fact that it accounts for a tremendous portion of its portfolio.
There are two lessons here: Investors should (1) target long-term returns and (2) let their winners run, within reason. Legendary fund manager Peter Lynch said it perfectly: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds." Buffett actually referenced that quote in his 1988 letter to Berkshire shareholders. He also said: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
As a caveat, I am not suggesting that readers rebalance their portfolios by putting 50% of their money in any single stock. Buffett may feel comfortable with that type of asset allocation, but he is also one of the most accomplished investors in history. Diversity is a good thing for most people, and Buffett agrees, provided it is done correctly. For instance, he has frequently recommended an S&P 500 index fund, which is essentially a diversified basket of American businesses.
