When it comes to making money on Wall Street, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett is, arguably, in a class of his own. In the 58 years that the Oracle of Omaha has led Berkshire Hathaway, his company's Class A shares have enjoyed a nearly 20% annualized return. That's roughly double the total annualized returns, including dividends paid, for the benchmark S&P 500 over the same stretch.
However, outperformance isn't the only reason Buffett is revered by professional and everyday investors. His willingness and openness to share his investment philosophy has won the Oracle of Omaha quite the fan base.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But what's often overlooked about Warren Buffett's success is that he's no fan of diversification. While he and his investment lieutenants, Ted Weschler and Todd Combs, have packed Berkshire Hathaway's portfolio with more than 50 securities (including exchange-traded funds), the vast majority of the company's invested assets can be traced to just a handful of stocks.
As of the closing bell on Sept. 22, 2023, 83% ($288.5 billion) of Warren Buffett's nearly $347 billion portfolio was invested in just eight stocks.
1. Apple: $160,030,799,170 (46.1% of invested assets)
The clearest indication that Buffett favors putting a lot of money to work in his top investment ideas can be seen with tech stock Apple (AAPL -0.35%). The largest publicly traded company in the U.S. accounts for more than 46% of Berkshire Hathaway's invested assets.
What makes Apple so special is that it checks all the appropriate boxes from an operating and capital-return standpoint. With regard to the former, Apple is one of the world's most recognized brands, its iPhone is the U.S. leader in smartphone share, and its burgeoning services segment should enhance customer loyalty and lift the company's operating margin over the long run.
However, Buffett's favorite aspect about Apple might be its shareholder-friendly capital-return program. Apple is parsing out $15 billion in dividend payments each year and repurchased in the ballpark of $600 billion worth of its common stock since introducing an aggressive buyback program in 2013.
The most aggressive rate-hiking cycle in decades is working in Bank of America's favor. Effective Federal Funds Rate data by YCharts.
2. Bank of America: $28,548,029,446 (8.2% of invested assets)
The second-largest holding in Berkshire Hathaway's portfolio is Bank of America (BAC -0.21%). Buffett's company holds more than 1 billion shares of BofA, equating to a 13% stake.
What the Oracle of Omaha loves about bank stocks is their ability to ride the U.S. economy's coattails to big gains over the long run. Though Buffett is well aware that economic downturns are both normal and inevitable, he also knows that recessions are short-lived. He's angled his portfolio to be highly cyclical so it can take advantage of disproportionately longer periods of economic expansion. Bank of America's loan and investment portfolio should do just that.
It also doesn't hurt that Bank of America has the highest interest-rate sensitivity of the big U.S. banks. The steepest rate-hiking cycle from the Fed in four decades is padding BofA's coffers with billions of dollars in added net-interest income each quarter.
3. American Express: $23,208,565,956 (6.7% of invested assets)
Another top holding in Buffett's portfolio is credit-services provider American Express (AXP -0.62%). AmEx, as it's more commonly known, accounts for more than $23 billion of invested assets and is a 30-year continuous holding for Berkshire Hathaway.
The company's success stems from its ability to generate income from both sides of a transaction. It's the No. 3 player in payment processing in the U.S. and also generates fees and interest income by lending to cardholders worldwide. Similar to Bank of America, it's taking advantage of long-winded periods of economic expansion.
The other competitive advantage for AmEx is that it has a knack for attracting high-earning cardholders. High-income individuals are less likely to alter their buying habits or fail to pay their bills during minor economic disruptions.
Image source: Coca-Cola.
4. Coca-Cola: $23,040,000,000 (6.6% of invested assets)
Beverage stock Coca-Cola (KO) clocks in as Berkshire Hathaway's fourth-largest holding and the company's longest-held stock (35 years and counting). Thanks to a very low-cost basis of $3.2475 per share in Coca-Cola, Berkshire is enjoying a nearly 57% yield, relative to cost.
One reason Coca-Cola continues to thrive is its virtually unparalleled geographic diversity. With the exception of Cuba, North Korea, and Russia, Coke has operations ongoing in every other country. This allows it to generate predictable operating results in developed markets, while leaning on higher organic growth in developing/emerging countries.
Like Apple, Coca-Cola is also one of the most recognized brands in the world. It's had success leaning on digital advertising to cater to a younger generation of consumers but can still rely on brand-name ambassadors to connect with more mature audiences. Warren Buffett tends to love businesses viewed as wholesome brands.
A meaningful rally in the spot price of crude oil has helped Chevron reduce its net debt. WTI Crude Oil Spot Price data by YCharts.
5. Chevron: $20,472,413,554 (5.9% of invested assets)
In recent years, energy stocks have accounted for a meaningful percentage of Warren Buffett's portfolio. Oil and gas stock Chevron (CVX 0.37%) is leading that charge.
While Buffett's big investment in Chevron is a pretty clear bet on higher crude oil spot prices, he's likely intrigued even more by Chevron being an integrated energy company.
Though it generates its highest operating margin from drilling, Chevron also owns transmission pipelines, chemical plants, and refineries. These ancillary operations bring in significant revenue for the company and help to hedge the downside in the spot price of crude oil.
Furthermore, Chevron's balance sheet is exceptionally flexible for a major energy company, with its net-debt ratio coming in at just 7%, as of the end of June. With top-tier financial flexibility, Chevron has the luxury of pulling the trigger on acquisitions or major projects.
6. Occidental Petroleum: $14,095,484,885 (4.1% of invested assets)
Yet another energy stock that the Oracle of Omaha and his investing lieutenants have piled into is Occidental Petroleum (OXY -0.15%). Occidental, like Chevron, is an integrated operator -- but with two distinct differences.
Whereas Chevron brings in a good amount of revenue from its transmission pipelines, refineries, and chemical plants, Occidental generates most of its revenue from drilling, with a significantly smaller portion derived from chemical plants. In other words, it's far more sensitive to fluctuations in the spot price of crude oil than Chevron (and most other major drillers, for that matter).
The other big difference between Chevron and Occidental Petroleum can be seen in their balance sheets. Despite reducing its net debt by more than $15 billion in two years, Occidental is still lugging around close to $19.7 billion in net debt. There's far less financial flexibility with Occidental than global energy major Chevron.
Kraft Heinz may have issues, but outpacing the highest inflation rate in 40 years in 2022 hasn't been one of them. US Inflation Rate data by YCharts.
7. Kraft Heinz: $11,123,685,383 (3.2% of invested assets)
Even the best investors are capable of being wrong, and consumer staples stock Kraft Heinz (KHC -0.55%) represents one of Buffett's few mistakes. Despite being a drag on Berkshire's portfolio, Kraft Heinz still accounts for more than 3% of invested assets.
On the bright side, Kraft Heinz sells extremely well-known packaged foods, snacks, and condiments. The familiarity of its brands, coupled with food being a necessity, has helped the company pass along price hikes and outpace historically high inflation rates since the COVID-19 pandemic began.
However, Kraft Heinz is fighting its competition with one arm tied behind its proverbial back. It closed out its fiscal second quarter (ended July 1, 2023) with just $947 million in cash and cash equivalents, compared to $20 billion in debt. Additionally, overpriced acquisitions have Kraft Heinz carrying almost $31 billion in goodwill on its balance sheet. Such a large figure may signal that another sizable write-down is in the company's future.
8. Moody's: $7,998,435,423 (2.3% of invested assets)
The eighth and final stock that, with the other seven holdings listed, collectively adds up to 83% of Warren Buffett's nearly $347 billion portfolio is credit-ratings agency Moody's (MCO 0.25%). With the exception of Coca-Cola and AmEx, Moody's is Berkshire's third longest-held stock (23 years).
For more than a decade, Moody's credit-rating division benefited from historically low lending rates. The desire of businesses and governments to raise cheap capital by issuing debt kept Moody's bond-rating division busy. But with lending rates climbing at a rapid pace, demand for bond ratings is tapering.
The good news for Moody's is that it has another highly successful operating segment to pick up the slack. Moody's Analytics is perfectly suited to an economic environment dominated by uncertainty. Demand for its risk analysis and compliance services should only grow in the coming quarters.
