Wall Street is a bona fide long-term wealth creator, and few money managers know this better than Berkshire Hathaway (BRK.A 0.43%) (BRK.B 0.47%) CEO Warren Buffett. Since taking the reins at Berkshire nearly six decades ago, the appropriately named "Oracle of Omaha" has overseen a 4,913,549% aggregate return in his company's Class A shares (BRK.A) and practically doubled up the annualized total return, including dividends paid, of the broad-based S&P 500.
Warren Buffett's "recipe" for success is no secret. On numerous occasions he's been more than willing to share the characteristics/traits he looks for in the businesses he invests in. You'll often find the Oracle of Omaha and his closest investment aides, Ted Weschler and Todd Combs, adding brand-name, time-tested companies to Berkshire's portfolio.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But something else worth noting is just how important portfolio concentration has been to Berkshire Hathaway's long-term success. The company's top investment minds, which until his recent passing included the great Charlie Munger, have long believed that added weighting should be given to their best ideas.
As of the closing bell on April 12, 2024, 68% ($253.2 billion) of the $372 billion portfolio Warren Buffett oversees at Berkshire Hathaway was invested in just four stocks.
Apple: $159,876,617,000 in market value (42.9% of invested assets)
If there was any doubt that Buffett and his team prefer to bet big on their top investment ideas, look no further than tech stock Apple (AAPL -0.60%). Despite Berkshire Hathway having stakes in 45 stocks and two index funds, nearly 43% of invested assets are tied up in Apple.
The Oracle of Omaha's love for Apple was professed during Berkshire's annual shareholder meeting last May, where Buffett commented that Apple is "a better businesses than any we own." It's a particularly strong statement given that his company outright owns insurer GEICO and railroad BNSF, among roughly five dozen other businesses.
One factor that helps check all the right boxes for Apple is its top-notch management team. CEO Tim Cook is currently leading Apple's transformation to a platform-driven operating model. Although the company isn't turning its back on the physical products that endeared it to consumers (iPhone, iPad, Mac, and Apple Watch), it's simply evolving to focus its efforts on subscription services.
A subscription-driven platform should help Apple lift its operating margin over time, as well as smooth out sales fluctuations typically observed during major iPhone upgrade cycles. Further, subscriptions should enhance Apple's already impressive customer loyalty and keep consumers within its ecosystem of products and services.
However, Warren Buffett's favorite thing about Apple might just be its unsurpassed capital-return program. Apple is doling out $14.8 billion in annual dividends to its shareholders and has repurchased $651 billion worth of its common stock since initiating a buyback program in 2013. These buybacks have steadily increased Berkshire's ownership stake in the company.
Bank of America: $36,695,773,295 in market value (9.9% of invested assets)
Though Apple accounts for the lion's share of Berkshire Hathaway's invested assets, there's no sector Buffett has historically piled into more than financials. Money-center giant Bank of America (BAC -0.16%) accounts for almost 10% of Berkshire's $372 billion investment portfolio.
What makes bank stocks so attractive to the Oracle of Omaha is their ability to take advantage of long-winded periods of growth. The U.S. economy spends a disproportionate length of time expanding, relative to contracting, which allows money-center banks like BofA to grow their loan portfolios over time and generate more interest income.
But Bank of America has more going for it than just the steady long-term growth of the U.S. economy. For starters, it's the most interest-sensitive among America's biggest banks. Since March 2022, the Federal Reserve has raised interest rates at the fastest pace in four decades. In turn, BofA has seen its net-interest income increase by billions of dollars each quarter.
What's been even more impressive is BofA's efforts to encourage digital banking. Since the end of 2020, consumer household adoption of digital banking has risen six percentage points to 75%, with nearly half of all loan sales being completed online or via mobile app during the December-ended quarter. As consumers shift their banking habits to digital platforms, Bank of America has the luxury of consolidating some of its physical branches and lowering its expenses.
The cherry on the sundae for Warren Buffett is that Berkshire's BofA stake is generating close to $992 million in annual dividend income.
Image source: American Express.
American Express: $33,081,454,740 in market value (8.9% of invested assets)
Did I mention that financial stocks are something of a go-to for the Oracle of Omaha? Credit-services kingpin American Express (AXP -1.10%) has been a continuous holding in Berkshire's portfolio for 33 years (and counting) and accounts for just shy of 9% of invested assets.
Like Bank of America, AmEx benefits from extended periods of growth. Whereas no U.S. recession has surpassed the 18-month mark since the end of World War II, there have been two periods of expansion that surpassed 10 years. These lengthy cycles of growth spur consumers and businesses to spend, which is great news for AmEx.
The company-specific reason American Express has outperformed for so long is its willingness to play both sides of the transaction aisle. On one hand, it's the No. 3 payment processor in the U.S. (the world's largest market for consumption) by credit card network purchase volume. If the U.S. and global economy are booming, it'll generate plenty of fees from merchants.
On the other hand, it also acts as a lender. The company's cardholders may pay annual fees and interest to American Express. Though being a lender can expose AmEx to credit delinquencies and potential loan losses during economic downturns, being able to double dip during lengthy periods of growth makes this dual approach worthwhile.
I'd be remiss if I didn't also mention that American Express has an uncanny ability to attract high earners. Well-to-do cardholders are less likely to alter their spending habits or fail to pay their bills when the rate of inflation picks up or a minor recession occurs. In theory, AmEx is better prepared for economic downturns than most lending institutions.
Coca-Cola: $23,312,000,000 in market value (6.3% of invested assets)
The fourth top holding in Berkshire Hathaway's $372 billion portfolio is none other than Warren Buffett's longest-held stock, Coca-Cola (KO 0.26%). Shares of Coca-Cola have been continuously held by the Oracle of Omaha's company since 1988.
If you want proof that time is an undeniable ally for investors, Coca-Cola is a bubbling example. Berkshire Hathaway's cost basis in this beverage behemoth is about $3.2475 per share. But thanks to Coke's 62 consecutive years of base annual dividend increases, it's now parsing out $1.94 per share each year to its shareholders. Berkshire's investment team is overseeing a 60% annual yield relative to their company's cost basis in Coca-Cola!
Coca-Cola's lengthy track record of success can be boiled down to three factors. First, it's a consumer staples stock. It provides a basic necessity good (beverages) that consumers are going to purchase regardless of how well or poorly the U.S. or global economy are performing. This has led to highly predictable operating cash flow year after year.
Secondly, Coca-Cola's geographic diversity is practically unmatched. With the exception of North Korea, Cuba, and Russia (due to its invasion of Ukraine), Coke has ongoing operations in every other country. It's able to move the organic growth needle thanks to its presence in emerging markets, but is bringing in predicable cash flow in developed countries.
The third catalyst has been its top-notch marketing efforts. It's shifted a substantial portion of its advertising budget to digital channels to reach a younger audience. However, Coca-Cola has a storied history it can lean on to connect with its mature consumers.
