Many financial advisors strongly recommend investors diversify their portfolios. They subscribe to Sir John Templeton's principle, "Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong."
But Warren Buffett seemingly isn't a big fan of diversification. Buffett has nearly 68% of Berkshire Hathaway's $361 billion portfolio invested in only four stocks. Why?
Buffett's big four
Berkshire owns more than 905 million shares of Apple (AAPL 7.00%) worth over $152 billion. This one stock makes up a whopping 42% of Berkshire's portfolio. The percentage was even higher last year before Buffett (or one of his two investment managers) trimmed Berkshire's position in Apple a little in the fourth quarter of 2023.
Bank of America (BAC 0.87%) ranks as Berkshire's second-largest holding. The current value of the conglomerate's 1.03 billion shares is nearly $36.4 billion -- a little over 10% of its total portfolio.
American Express (AXP -0.56%) trails just slightly behind Bank of America as Berkshire's No. 3 position. Buffett's company owns roughly 151.6 million shares of AmEx with a total value topping $33 billion. That's enough to comprise slightly over 9% of Berkshire's portfolio.
The Coca-Cola Company (KO 0.12%) claims the No. 4 spot. Berkshire's 400 million shares in the food and beverage giant are worth around $23.4 billion. Coca-Cola makes up 6.5% of the conglomerate's portfolio.
Why Buffett has invested so heavily in these stocks
It's important to note that Berkshire Hathaway owns over 40 stocks in addition to Apple, Bank of America, American Express, and Coca-Cola. However, there are several reasons why Buffett has so much of Berkshire's money invested so heavily in these four stocks.
Most importantly, he believes in their businesses. At last year's annual Berkshire Hathaway shareholder meeting, Buffett said Apple is a "better business than any we own." Leadership is key, too. At this same meeting, Buffett stated, "I like Bank of America and I like the management."
In his letter to Berkshire shareholders earlier this year, Buffett listed Amex and Coke among the stocks he expects to "maintain indefinitely." He explained, "When you find a truly wonderful business, stick with it."
Buffett wasn't always so heavily invested in these stocks. However, Coca-Cola and American Express are his two longest-held positions. The stocks have increased so much in value through the years that they've become a bigger part of Berkshire's portfolio. Buffett even noted in the latest shareholder letter that Berkshire's share of AmEx's earnings in 2023 "considerably exceeded the $1.3 billion cost of our long-ago purchase."
Berkshire has only owned Apple and Bank of America since 2016 and 2017, respectively. Since then, though, Apple's share price has skyrocketed more than 6x. BofA hasn't been as big of a winner, but it's given Berkshire a significant amount of dividend income.
Should you follow Buffett's lead?
In 1998, Buffett summarized his philosophy about diversification to a group of University of Florida students: "If you really know businesses, you probably shouldn't own more than six of them. If you can identify six wonderful businesses, that is all the diversification you need, and you're going to make a lot of money."
Should you follow Buffett's lead and invest heavily in a small number of stocks? Only if you can meet the two criteria he specified:
- Have a thorough understanding of their underlying businesses.
- Find "wonderful businesses."
It's important to note another often-overlooked statement by the legendary investor: "If you are not a professional investor, if your goal is not to manage money in such a way so you get a significantly better return than the world, then I believe in extreme diversification."
As it turns out, Buffett is on the same page as many financial advisors. Diversification is a good thing for most investors.
