If you've ever wondering why more than 40,000 people flock to Berkshire Hathaway's (BRK.A 0.68%) (BRK.B 0.93%) annual shareholder meeting each year, look no further than the track record of longtime CEO Warren Buffett.
Since the affably named "Oracle of Omaha" became CEO in the mid-1960s, he's overseen a greater-than 4,900,000% aggregate return in his company's Class A shares (BRK.A). Returns like these are bound to get money managers noticed on Wall Street.
Although extensive books have been written discussing the "recipe" Buffett has used to grow his wealth and that of Berkshire's long-term shareholders, the one factor that's arguably played the biggest role in his investment success is portfolio concentration.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
As of the closing bell on April 26, 2024, Berkshire's $372 billion portfolio was spread across 45 stocks and two index funds. However, a small number of these holdings make up the lion's share of invested assets. Buffett and his top investment aides, which until his recent passing including the great Charlie Munger, have long believed that their best ideas deserve added weighting.
The following two magnificent companies currently comprise 52% of the $372 billion portfolio Warren Buffett oversees at Berkshire Hathaway.
Apple: $153.3 billion in market value (41.2% of invested assets)
Perhaps it's no surprise that the largest holding (by a mile!) in Warren Buffett's portfolio, tech stock Apple (AAPL -0.01%), is the company he referred to as "a better business than any we own" during Berkshire Hathaway's 2023 annual shareholder meeting. Apple accounts for more than 41% of invested assets.
Warren Buffett's love for Apple as an investment and business boils down to four factors: branding, innovation, management, and capital returns.
With regard to the former, Apple has some of the most loyal customers on the planet, and is recognized as one of the most-valuable global brands. This loyalty goes a long way to generating predictable sales and cash flow year after year.
Secondly, Apple is an innovator on multiple fronts. Most people are rightly familiar with its success as an inventor/producer of physical products that include the iPhone, Mac, iPad, and Apple Watch. Since introducing a 5G-capable version of the iPhone during the fourth quarter of 2020, Apple has controlled at least half of domestic smartphone market share.
But Apple is also innovating beyond its physical products. The company is undergoing a multiyear transition that's emphasizing subscription services. A services-driven model should lift its operating margin, generate predictable cash flow in any economic climate, and smooth out the sales fluctuations that have historically accompanied major iPhone upgrade cycles.
The third reason Warren Buffett has no intention of parting ways with his company's massive stake in Apple is the company's top-tier management team. CEO Tim Cook is trusted by consumers and Wall Street, and is the brains behind Apple's services transformation.
Lastly, Apple's capital-return program is unrivaled among publicly traded companies. Aside from dishing out $14.8 billion in dividend income annually to its shareholders, its board has green-lit the repurchase of $651 billion worth of its common stock since the start of 2013. Put another way, Apple has spent more on buybacks over the last 10 years and change than the market caps of all but eight S&P 500 companies, one of which is itself.
Share buybacks offer a dual benefit in Buffett's eyes. Reducing Apple's outstanding share count with steady or growing net income results in higher earnings per share (EPS) and a more attractive valuation. Additionally, share repurchases are increasing Berkshire's ownership stake in Apple without Buffett or his aides having to lift a finger.
Image source: Getty Images.
Bank of America: $39.1 billion in market value (10.5% of invested assets)
The other magnificent stock that, along with Apple, makes up 52% of the $372 billion portfolio Warren Buffett manages at Berkshire Hathaway is money-center goliath Bank of America (BAC 0.23%), which is commonly referred to as "BofA."
There's not a sector the Oracle of Omaha loves putting his company's capital to work in more than financials. The reason for this is simple: they're cyclical.
Recessions are both a normal and inevitable part of the economic cycle. But Berkshire's greatest investment minds astutely realize that downturns in the economy don't last long. Only three recessions since 1945 have lasted at least 12 months, and none have surpassed 18 months in length.
On the other hand, most periods of expansion have stuck around for multiple years, including two growth spurts that endured for longer than a decade. Bank stocks are able to take advantage of these long-winded expansions by growing their loan portfolios.
Perhaps no money-center bank is better positioned in the current economic climate than Bank of America. Among America's largest banks by assets, it's the most sensitive to changes in interest rates. The Federal Reserve undertaking its most-aggressive rate-hiking cycle since the early 1980s has translated into BofA generating billions of dollars in added interest income each quarter. If inflation remains stubbornly high and the Fed is forced to delay its rate-easing cycle, Bank of America should disproportionately benefit.
Bank of America's ongoing investments in technology are paying off, as well. It's successfully shifted 76% of its consumer households to digital banking and completed 50% of all consumer loan sales online or via mobile app during the March-ended quarter. Digital transactions are considerably cheaper for banks than in-person interactions. As digital banking adoption grows, so should BofA's operating efficiency.
Bank stocks are also known for their hearty capital-return programs. When the U.S. economy is expanding, it's not uncommon for Bank of America's board to return in excess of $20 billion, annually, to its shareholders via dividends and buybacks.
Warren Buffett simply has no incentive to sell Berkshire Hathaway's stake in Bank of America anytime soon.
