Warren Buffett is one of the most recognizable names in investing. When you consider Buffett is worth over $110 billion, and his conglomerate, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), is one of the premier blue chip stocks on the market, it's easy to see why that might be the case.
Buffett and his team's success at Berkshire Hathaway has inspired many investors to attempt to mirror their investment strategies. However, one aspect of Berkshire Hathaway's portfolio that the average investor should avoid is its concentration in just a few stocks.
The portfolio consists of around 50 companies, but a handful make up most of it. As of Sept. 30, 2023, here are Berkshire Hathaway's top holdings:
| Company | Number of Shares Owned | Percentage of Stock Portfolio |
|---|---|---|
| Apple | 915,560,382 | 48.2% |
| Bank of America | 1,032,852,006 | 8.8% |
| American Express | 151,610,700 | 7.3% |
| Coca-Cola | 400,000,000 | 6.5% |
| Chevron | 110,248,289 | 4.4% |
Data source: Berkshire Hathaway 13F Filing.
This concentration reflects Buffett and Berkshire Hathaway's philosophy of keying in on companies they believe have long-term potential and strong market positions. Even so, investors shouldn't lose sight of their personal objectives and risk tolerance.
The good is good, but the bad can be ugly
It's hard to argue against having the world's most valuable public company account for almost 50% of your stock portfolio when it's up over 860% in the past decade and 328% in the past five years. However, hindsight is always 20/20. Just as the success of a handful of stocks has boosted Berkshire Hathaway's portfolio, the opposite could also happen.
Do I think that it will happen? Not at all. But the stock market isn't logical, and nobody can predict its movements. Diversification is meant to be somewhat of a safety net. When a particular company or sector slumps or underperforms, the other parts of your portfolio can help pull some of the weight and provide stability.
If Berkshire Hathaway had seen nearly half of its stock portfolio trade like Kraft Heinz (another large holding) over the past five years, it returns would look a lot different.
Data by YCharts.
So, what makes Buffett and Berkshire Hathaway an exception?
It seems counterintuitive to say how successful Berkshire Hathaway has been and then turn around and tell you not to copy their moves, but the company's situation is simply not representative of the average investor.
To begin, Berkshire Hathaway's success results from Buffett and his team's exceptional ability to analyze a company better than most individual investors. This includes in-depth and meticulous analysis of financial statements, economic indicators, market trends, etc.
This doesn't mean the average investor can't do those things; they just realistically won't because of how time-consuming it is, nor do they have access to company executives and advisors like Berkshire does.
It's also important to note the difference in financial situations between Berkshire Hathaway and the average investor. Berkshire Hathaway is working with a ton of resources and capital, so it can afford to take larger risks or absorb potential losses that could be devastating for an individual investor.
You can mimic the investments without the allocation
If you want to mirror Berkshire Hathaway's investments, that's your choice, and plenty of investors do it. However, you don't have to mirror the allocation. You can invest in Apple, Bank of America, American Express, Coca-Cola, and Chevron, but these stock don't have to -- and probably shouldn't -- make up 75% of your stock portfolio.
A diversified portfolio might not grow the way an individual stock can, but it also carries less risk while prioritizing long-term returns and stability. There's a reason it's widely considered one of the fundamental pillars of investing.
