For nearly six decades, Warren Buffett has put on a master class in how to beat Wall Street. Since taking over as CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) in the mid-1960s, he's led his company's Class A shares (BRK.A) to a jaw-dropping aggregate return of 4,961,342%, as of the closing bell on March 1.
Extensive books have been written discussing the investing philosophies that have allowed the Oracle of Omaha to trounce Wall Street's benchmark index, the S&P 500. These traits include buying stakes in brand-name businesses with strong management teams, as well as investing with a long-term mindset.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But if there's one catalyst to Buffett's undeniable investing success that doesn't get nearly enough credit, it's his penchant for portfolio concentration. Both he and the recently departed Charlie Munger, who Buffett described as the "Architect of Berkshire Hathaway" in his annual letter to shareholders, have firmly believed that their top investment ideas deserve added weighting. If these top holdings perform well, it likely means Berkshire Hathaway stock can head even higher.
Based on closing values from March 1, 78% -- $290 billion -- of the $369 billion investment portfolio Warren Buffett oversees at Berkshire Hathaway was invested in only six stocks.
1. Apple: $162,692,909,600 (44% of invested assets)
Any question investors may have had about the Oracle of Omaha's desire to concentrate his company's portfolio is answered by looking at Berkshire's mammoth stake in tech stock Apple (AAPL -0.35%). Even after Buffett and his team reduced their company's stake in Apple by roughly 1% during the December-ended quarter, it still accounts for 44% of invested assets.
Apple's innovation has driven the outperformance of its stock for years. Since introducing a 5G-capable iPhone during the fourth quarter of 2020, it's pretty consistently held a 50% or greater share of the U.S. smartphone market.
But this innovation extends well beyond its well-known physical products. For years, CEO Tim Cook has been overseeing a transformation that's emphasized subscription services. To be clear, Apple isn't forgetting about the physical products, like the iPhone, Mac, and iPad, that brought it fame. Rather, it's evolving into a platforms company that'll further enhance customer loyalty and keep these customers within its ecosystem of products and services.
The Oracle of Omaha is also, undeniably, a fan of Apple's world-leading capital-return program. Since introducing a share repurchase program in 2013, Apple has bought back more than $600 billion worth of its common stock.
2. Bank of America: $35,478,466,406 (9.6% of invested assets)
Another company that Warren Buffett and his investment aides, Todd Combs and Ted Weschler, clearly love is Bank of America (BAC -0.21%). Berkshire owns more than 13% of the outstanding shares of BofA, which equates to almost $35.5 billion in market value.
The lure of financial stocks for the Oracle of Omaha has always been the cyclical nature of the industry. Even though recessions are an inevitable part of the economic cycle, economic downturns pass quickly. Whereas no recession since the end of World War II has lasted longer than 18 months, two periods of growth over the same span stuck around for at least a decade. Companies like Bank of America should be able to successfully grow their loan portfolios over time as the U.S. economy expands.
Interestingly enough, Bank of America also holds an advantage in the current economic climate as the most interest-sensitive of all U.S. money-center banks. In other words, no bank will see its net-interest income shift more with changes to interest rates. The Fed's most aggressive rate-hiking cycle since the early 1980s has added billions of dollars in net-interest income to BofA's bottom line each quarter.
To boot, BofA typically returns in excess of $20 billion to shareholders each year via dividends and buybacks when the U.S. economy is firing on all cylinders.
3. American Express: $33,302,806,362 (9% of invested assets)
Even though a tech stock accounts for the leading stake in Berkshire Hathaway's portfolio, there's not a sector Buffett enjoys putting his company's cash to work in more than financials. It's why American Express (AXP -0.62%) is the second financial stock in Berkshire's top-three holdings.
The not-so-subtle secret to AmEx's continued success is its willingness to play on both sides of the transaction aisle. In the U.S., which is the top market for consumption globally, it's the clear No. 3 in credit card network purchase volume.
But in addition to facilitating transactions and collecting a fee from merchants, American Express is also acting as a lender to consumers and businesses in which it earns annual fees and interest income. During extended periods of economic growth, AmEx's ability to double-dip allows it to thrive.
The other factor that makes American Express a top-notch investment is its success in luring well-to-do consumers. People with higher incomes are less likely than the average earner to alter their spending habits during minor periods of economic disruption. On paper, this should help AmEx navigate challenging economic climates better than most lending institutions.
Image source: Coca-Cola.
4. Coca-Cola: $23,812,000,000 (6.4% of invested assets)
The fourth-largest holding is the longest-tenured stock in Buffett's portfolio, beverage company Coca-Cola (KO). Shares of Coca-Cola have been held since 1988.
What's more, Berkshire Hathaway is netting a roughly 60% annual yield on its Coke shares thanks to a minuscule cost basis of $3.2475 per share. Coca-Cola recently increased its base annual payout for a 62nd consecutive year.
A big reason the Oracle of Omaha and his investment team view Coca-Cola as a core holding is its consistency. According to Kantar's annual Brand Footprint report, Coca-Cola has been the most-chosen brand from retail shelves for 10 years running (as of 2022). Since it's selling consumer staples that'll be purchased in any economic climate, Coca-Cola's cash flow and profits tend to be highly predictable.
Coca-Cola also enjoys virtually unsurpassed geographic diversity. With the exception of Cuba, North Korea, and Russia, it has existing operations in every other country. This allows it to generate that aforementioned predictable cash flow in developed markets, while moving the organic growth needle via emerging markets.
5. Chevron: $19,268,321,146 (5.2% of invested assets)
Throughout much of this century, energy stocks have played little or no role in Berkshire Hathaway's portfolio. Over the past two years and change, we've witnessed a sizable shift in sentiment from Berkshire's brightest minds. Integrated oil and gas giant Chevron (CVX 0.37%) currently holds the No. 5 spot in the $369 billion portfolio the Oracle of Omaha oversees.
Having more than $19 billion invested in a leading oil and gas stock is a pretty clear indication that Buffett and his team believe the spot price of crude oil will remain above historic norms. Supporting this thesis is multiple years of capital underinvestment by major energy companies during the COVID-19 pandemic. This underinvestment has led to energy commodity supply constraints that should provide a healthy lift to the spot price of crude oil and push profits for drillers higher.
The "integrated" aspect of Chevron's operating model is also important. Although drilling generates its juiciest margins, Chevron owns transmission pipelines, chemical plants, and refineries. If the spot price of crude oil declines, the company's midstream and downstream assets act as a hedge that stabilizes its cash flow.
The icing on the cake here is that Chevron doles out a 4% yield and has raised its base annual dividend for 37 consecutive years.
A historically high spot price for crude oil has provided a lift to Occidental Petroleum's bottom line. WTI Crude Oil Spot Price data by YCharts.
6. Occidental Petroleum: $15,218,392,334 (4.1% of invested assets)
Warren Buffett's $369 billion portfolio at Berkshire Hathaway only has two energy stocks, but they occupy the fifth and sixth spots in terms of portfolio concentration. The 248 million shares of Occidental Petroleum (OXY -0.15%) held by Berkshire, worth $15.2 billion on March 1, have all been added since the start of 2022.
While the macro catalysts described with Chevron align similarly with integrated oil and gas operator Occidental, there are some very defined differences between these two companies.
For example, Occidental brings in the lion's share of its revenue from its upstream drilling segment. This means its operating cash flow is highly sensitive to shifts in the spot price of crude oil. While it'll benefit more than other integrated operators (including Chevron) if oil prices increase, the reciprocal is also true -- Occidental will struggle mightily if the spot price for crude oil significantly declines.
The other big difference between Chevron and Occidental can be seen on their balance sheets. Whereas Chevron has what's arguably the best balance sheet among oil majors with a low debt-to-equity ratio, Occidental is still lugging around $18.5 billion in net debt. Unlike Chevron, Occidental needs the spot price of crude oil to remain high to continue reducing its outstanding debt.
