Few people have the ability to captivate the attention of professional and everyday investors quite like billionaire Warren Buffett. Since becoming CEO of conglomerate Berkshire Hathaway (BRK.A 0.14%) (BRK.B 0.06%) in the mid-1960s, Buffett has delivered an annualized return for his company's Class A shares (BRK.A) of 19.8% (as of Dec. 31, 2022). That's double the annualized total return, including dividends paid, of the benchmark S&P 500 (9.9%) over the same timeline.
Riding the Oracle of Omaha's coattails to big gains and mirroring his trades has been easy, thanks to required quarterly 13F filings with the Securities and Exchange Commission. A 13F provides an under-the-hood look at what Wall Street's brightest minds bought and sold in the latest quarter.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
While there's a laundry list of reasons for Buffett's long-term success, such as his buy-and-hold ethos and love of dividend stocks, it's the Oracle of Omaha's portfolio concentration that deserves a meaningful amount of credit. Buffett and his investing team piling into their best ideas has led to outsized long-term returns.
Despite holding more than 50 securities in Berkshire Hathaway's $341 billion portfolio, as of the closing bell on Oct. 7, 2023, just two core stocks account for 56% ($189 billion) of invested assets.
Apple: $162,502,812,201 (47.7% of invested assets)
If there was ever any doubt that the Oracle of Omaha favors portfolio concentration, the fact that tech stock Apple (AAPL 0.19%) accounts for nearly 48% of invested assets seals it.
It isn't surprising that Berkshire's portfolio holds such a sizable stake in Apple. During the company's annual shareholder meeting in early May, Buffett described Apple as "a better business than any we own." It's an incredibly strong statement when you consider that Berkshire owns dominant railroad BNSF and highly profitable insurer GEICO, along with roughly five dozen other businesses.
One reason Apple is lauded as an investment is its brand value. Apple is one of the world's most recognized brands and is frequently labeled in surveys as the most valuable brand. Consumers are eager to buy its newly released products and have remained exceptionally loyal to the brand over the years.
Apple's innovative capacity provides another reason for Warren Buffett and his investing lieutenants to trust Apple with nearly half of Berkshire Hathaway's invested assets. In addition to Apple accounting for more than half of all smartphone market share in the U.S., it's been steadily pivoting to a subscription-driven future. Evolving into a platforms company should lift Apple's operating margin over time, while also minimizing the revenue fluctuations that often accompany major iPhone upgrade cycles.
To build on this point, the Oracle of Omaha and his team favor businesses with strong, trusted management teams. Apple CEO Tim Cook has overseen numerous evolutions of the iPhone and is successfully transitioning Apple to a higher-margin future, driven by subscriptions.
But what may ultimately be captivating Warren Buffett's attention is Apple's capital-return program, which is second to none. On top of doling out one of the largest nominal-dollar dividends on the planet ($15 billion annually), Apple has repurchased around $600 billion worth of its common shares since the start of 2013. The amount Apple has spent buying back its stock is greater than the market cap of 492 out of the 500 companies that comprise the S&P 500.
The beauty of buybacks is they can increase earnings per share for companies with steady or growing net income, which can make them appear more fundamentally attractive to investors. Repurchases are also allowing Berkshire Hathaway to become a larger stakeholder in Apple without Buffett or his team having to lift a finger.
Image source: Getty Images.
Bank of America: $26,926,451,796 (7.9% of invested assets)
The other brand-name stock that accounts for a sizable percentage of Berkshire Hathaway's invested assets is Bank of America (BAC -0.34%), which is commonly known as "BofA." The nearly $27 billion invested in BofA makes up almost 8% of the $341 billion investment portfolio Warren Buffett oversees.
There arguably isn't a sector the Oracle of Omaha loves investing in more than financials. He's an especially big fan of bank stocks, largely due to their cyclical nature.
Although recessions are a normal and inevitable part of the economic cycle, all 12 U.S. recessions following World War II have lasted between two and 18 months. By comparison, most periods of expansion after World War II have lasted years, if not a full decade. Bank stocks benefit from these disproportionately long periods of economic growth.
On a more company-specific basis, there are three factors that have attracted the Oracle of Omaha to Bank of America.
To begin with, Bank of America is the most interest-sensitive bank of the large U.S. money-center banks. In other words, as interest rates shift higher or lower, no large bank is going to see a greater impact on its net interest income than BofA. On the heels of the Federal Reserve increasing the federal funds rate at the fastest clip in more than four decades -- 525 basis points since March 2022 -- Bank of America has enjoyed an enormous uptick in quarterly net interest income.
The second reason for Warren Buffett and his team to be pleased with BofA as an investment is the company's execution. In particular, Bank of America has aggressively put money to work in a variety of digitization initiatives. Almost three-quarters of all households banking with BofA are doing so digitally (online or via mobile app). As the number of transactions and loans conducted digitally grows, Bank of America should see if operating efficiency continues to improve.
The third and final factor that's likely encouraged Warren Buffett to pile into Bank of America is its generally robust capital-return program. Although the Fed has the final say on the capital-return programs of the largest banks by assets in the U.S., BofA commonly returns $20 billion or more annually to its shareholders via a combination of dividends and share buybacks when the U.S. economy is firing on all cylinders.
