If you've ever wondered why Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett commands so much attention, look no further than his track record.
Despite being just as fallible as every other investor on the planet, he's delivered an aggregate return of better than 4,100,000% for his company's Class A shares (BRK.A) since becoming CEO of Berkshire in the mid-1960s. By comparison, the broad-based S&P 500 has generated a total return, inclusive of dividends paid, that doesn't even tally 30,000% over the same nearly six-decade stretch.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Many of the Oracle of Omaha's "ingredients" for investing success are well known, such as his long-term mindset and love of brand businesses with trusted management teams. But one of the biggest catalysts to Buffett's outperformance, which receives far too little credit, is his penchant for portfolio concentration. Even though Berkshire Hathaway holds stakes in more than 50 securities, Buffett and his investment team have long believed in putting most of their company's invested capital to work in their top ideas.
As of the closing bell on Oct. 20, approximately 74% ($249.3 billion) of Warren Buffett's $335 billion investment portfolio was invested in just five stocks.
Apple: $158.3 billion (47.2% of invested assets)
If there were ever any doubt that Warren Buffett favors portfolio concentration, tech stock Apple (AAPL -0.35%) completely puts that uncertainty to bed. The more than $158 billion the Oracle of Omaha has tied up in Apple stock accounts for close to half of Berkshire Hathaway's invested assets.
During Berkshire's annual shareholder meeting in early May, Buffett opined that Apple is "a better business than any we own." Mind you, Berkshire owns a highly successful insurance company (GEICO) and railroad (BNSF), and has generated a nearly 3,000% unrealized gain on credit-rating agency Moody's, not counting dividends. Despite this, Apple is viewed as a pillar to Berkshire Hathaway's foundation.
Most eyes are likely on Apple's recently debuted iPhone 15, which includes an all-new titanium shell and a faster processing chip. Apple holds a more than 50% share of the U.S. smartphone market, and iPhone continues to be the company's key sales driver.
However, Apple's ongoing transformation into a platforms-focused business is what's expected to really pump up its profit potential for the remainder of the decade, if not well beyond. Subscription services can lift Apple's operating margin, further improve customer loyalty, and help smooth out the sales fluctuations that often accompany major iPhone replacement cycles.
I'd be remiss if I didn't also mention Apple's capital-return program, which is unmatched among public companies. Apple is returning $15 billion annually as a dividend to its shareholders, and has repurchased around $600 billion worth of its common stock since the start of 2013.
Bank of America: $27.2 billion (8.1% of invested assets)
Even though Apple is Berkshire Hathaway's largest investment by a considerable amount, there's no question that bank stocks are where Warren Buffett's true expertise lies. This is a big reason why Bank of America (BAC -0.21%) is the second-largest holding by market value in the investment portfolio Buffett oversees at Berkshire.
As a long-term investor, the Oracle of Omaha is focused on winning what I like to refer to as the "numbers game." Though he realizes that recessions are an inevitable part of the economic cycle, he astutely understands that periods of expansion last significantly longer than recessions. Cyclical bank stocks like Bank of America should be able to grow their loan portfolio to take advantage of these extended periods of expansion.
In particular, Bank of America has the highest interest rate sensitivity among U.S. money-center banks. A cumulative 525-basis-point increase in the federal funds rate since March 2022 is generating billions of dollars in added net interest income each quarter. The further the Fed pushes out its easing cycle, the more profitable BofA is likely to be.
Bank stocks typically also offer robust capital-return programs -- at least when the U.S. economy is humming along. With central bank approval, it's not uncommon for Bank of America to return $20 billion or more to its shareholders each year via dividends and share buybacks. Warren Buffett is a huge fan of businesses that reward/incent long-term investing.
Image source: Coca-Cola.
Coca-Cola: $21.8 billion (6.5% of invested assets)
The longest-held stock in Berkshire Hathaway's portfolio -- beverage stock Coca-Cola (KO) -- has, once again, become the third-largest holding by market value. Shares of Coca-Cola have been a continuous holding by Buffett's company since 1988.
What Coca-Cola brings to the table is consistency, top-notch marketing, and a whopper of a dividend, relative to Berkshire's cost basis in the company.
With regard to the former, food and beverages are a necessity to live. Regardless of how well or poorly domestic or international economies are performing, consumers are unlikely to alter their shopping habits much. Since Coca-Cola's products are sold in all but three countries worldwide (Cuba, North Korea, and Russia), the company is raking in highly predictable cash flow in developed countries, while leaning on potentially faster organic growth opportunities in emerging/developing countries.
Coca-Cola also happens to be one of the world's most-recognized and valuable brands in the consumer goods space. It's one of a few wholesome brands that's been able to successfully transcend generational gaps and connect with consumers of all ages. Whether it's using artificial intelligence (AI) to tailor ads for a younger audience on social media or relying on well-known brand ambassadors for a more mature audience, Coke's marketing is a key reason for its long-term success.
Coca-Cola's $1.84/share base annual payout, in relation to Berkshire's sub-$3.25-per-share cost basis in the company, is netting a jaw-dropping 57% yield on cost each year for Buffett and company.
American Express: $21.5 billion (6.4% of invested assets)
The fourth-largest holding in the portfolio Buffett oversees at Berkshire Hathaway is credit-services provider American Express (AXP -0.62%). AmEx, as the company is commonly known, is the second longest-held stock by Berkshire Hathaway (since 1993), behind only Coca-Cola.
American Express is another company that's able to take advantage of the aforementioned "numbers game." Even though recessions will occur from time to time, all 12 U.S. recessions following World War II were short-lived. Nine lasted less than a year, while none of the 12 surpassed 18 months. That's music to the ears of cyclical stocks like American Express.
The true beauty of AmEx's operating model is its ability to play both sides of a transaction. On top of being the No. 3 payment processor in the U.S., based on credit card network purchase volume (as of 2021), it also acts a lender via its credit cards. This allows American Express to collect fees from merchants, as well as annual fees and/or interest income from its cardholders. Being able to double-dip during long-winded expansions has paid off handsomely.
Furthermore, American Express has always had a knack for attracting high-earning individuals as cardholders. High earners are less likely than the average cardholder to change their spending habits or fail to pay their bills during minor economic disruptions. AmEx's ability to court the well-to-do should help the company navigate short-lived downturns better than many of its peers.
Chevron: $20.5 billion (6.1% of invested assets)
The fifth stock that, collectively with Apple, Bank of America, Coca-Cola, and American Express, adds up to approximately 74% of Berkshire Hathaway's $335 billion in invested assets is energy stock Chevron (CVX 0.37%). Chevron is the newest holding on this list, having been first added to Berkshire's portfolio during the fourth quarter of 2020.
Big bets on the energy sector have been quite rare for the Oracle of Omaha and his team since this century began. Having more than $20 billion invested in Chevron appears to be a clear signal that Buffett and his investment team expect the spot price for crude oil to remain elevated or further increase.
A couple of macro factors certainly support a higher spot price for crude oil. For instance, Russia's ongoing war with Ukraine places Europe's energy supply needs into question. Additionally, more than three years of reduced capital investment by energy majors due to the COVID-19 pandemic has led to tight oil supply worldwide. Drilling provides Chevron with its juiciest margins.
However, Chevron is also an integrated energy company. It operates transmission pipelines, which generate highly predictable cash flow, as well as refineries and chemical plants that act as a hedge if the spot price of crude oil declines -- i.e., lower input costs and increased consumer demand help these downstream segments.
Big oil is known for paying gushing dividends as well. Chevron has increased its base annual payout for 36 consecutive years, and its board approved a $75 billion share repurchase program earlier this year.
