To The Moon

Portfolio concentration is a big reason for Berkshire Hathaway's long-term success.

For nearly six decades, $Berkshire Hathaway(BRK.A)$, $Berkshire Hathaway(BRK.B)$ CEO Warren Buffett has been making his shareholders decisively richer. Berkshire's Class A shares ( $Berkshire Hathaway(BRK.A)$ ) have doubled up the total annualized return of the S&P 500, including dividends, since he became CEO (19.8% vs. 9.9%).

The Oracle of Omaha's not-so-secret recipe for success has included sticking to sectors and industries he and his investing team know well, investing with a long-term mindset, and purchasing companies with well-known brands and trusted management teams.

But there's another key component that doesn't receive nearly enough credit for Berkshire Hathaway's outperformance: portfolio concentration. Even though Buffett and his investing lieutenants, Ted Weschler and Todd Combs, are overseeing a $344 billion portfolio that holds 49 securities, the bulk of this capital is concentrated in a small number of companies.

Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

BERKSHIRE HATHAWAY CEO WARREN BUFFETT. IMAGE SOURCE: THE MOTLEY FOOL.

As of April 16, 2023, a whopping 76% of Warren Buffett's $344 billion portfolio was invested in just five stocks. (Note, the following figures also include shares owned by the Oracle of Omaha's secret portfolio, New England Asset Management.)

Apple: $151.3 billion (44% of invested assets)

The biggest holding in Buffett's portfolio, accounting for 44% of invested assets, is tech-stock $Apple(AAPL)$ . In the Oracle of Omaha's 2021 letter to Berkshire Hathaway's shareholders, Apple was referred to as one of Berkshire's "four giants."

As of last weekend, Berkshire Hathaway was sitting on an estimated unrealized gain, not including dividends, of more than $117 billion from its Apple stake. This enormous return is a reflection of Apple's top-tier brand, its cutting-edge innovation, and an unrivaled capital-return program.

In terms of the former, Apple is one of the world's most recognized brands. Interbrand has named it the world's most valuable brand for 10 consecutive years. Further, Interbrand's brand value for Apple has catapulted from $21 billion in 2010 to $482 billion by 2022. 

When it comes to innovation, Apple is crushing it from both sides of the aisle. The physical products that endeared consumers to its brand continue to be a hit. The iPhone is the clear No. 1 smartphone in the U.S., while the iPad is the world's leading tablet. But Apple is also evolving and successfully building up its subscription services under the guidance of CEO Tim Cook.

Lastly, Apple is a capital-return superstar. It's returning $14.55 billion in annual dividend income to shareholders and has bought back in excess of $550 billion worth of its common stock in 10 years. Share buybacks are an easy way to get in Buffett's good graces.

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Bank of America: $30.5 billion (8.9% of invested assets)

The second-largest holding in Berkshire Hathaway's portfolio is banking-giant $Bank of America(BAC)$ . Buffett and his team initially invested in BofA preferred stock in 2011, following the Great Recession, but chose to convert Berkshire's stake in Bank of America to common stock in 2017.

The reason bank stocks are an absolute favorite of Warren Buffett is because they're cyclical money machines. While the Oracle of Omaha is well aware that recessions are an inevitable part of the economic cycle, he also knows that recessions tend to be short-lived.

Bank stocks, like BofA, are able to take advantage of loan and deposit growth during extended periods of economic expansion. In short, well-run bank stocks tend to grow in unison with the U.S. economy over the long term.

But there's something else special about Bank of America that Buffett and his lieutenants are probably appreciating right now: its interest-rate sensitivity. No money-center bank has more to gain or lose from interest-rate changes than BofA. With the Federal Reserve raising interest rates at the fastest pace in four decades, Bank of America is reaping the reward in the form of higher net interest income.

Bank stocks are also known for their fairly generous capital-return programs during bull markets. Though it would make sense for BofA CEO Brian Moynihan to be cautious at the moment, given that the Fed is now modeling a recession for later this year, it's not out of the ordinary for Bank of America to return $20 billion (or more) annually to shareholders via buybacks and dividends when the economy is firing on all cylinders.

An offshore energy drilling platform that's under construction.

Chevron: $28.9 billion (8.4% of invested assets)

Although bank stocks have long been Buffett's favorite industry in which to invest, energy stocks have been getting a lot of attention (and capital) of late. Since the fourth quarter of 2020, the Oracle of Omaha and his investing lieutenants have built a $28.9 billion stake in integrated oil and gas company $Chevron(CVX)$ .

The sheer size of this position indicates that Buffett expects the spot price for oil and/or natural gas to remain elevated for the foreseeable future. This thesis is supported by a globally challenged energy supply chain.

Three years of capital underinvestment caused by the pandemic, coupled with Russia's invasion of Ukraine, makes it unlikely that the oil and gas supply can be meaningfully increased anytime soon. Constrained supply is usually good news for energy commodities.

Chances are that Buffett is a fan of Chevron's integrated operating structure, as well. Though it generates the best operating margin from its upstream drilling segment, Chevron also owns transmission pipelines, chemical plants, and refineries. These are assets that either help hedge against declines in the price of oil or produce predictable operating cash flow in any economic environment.

Consistent with Berkshire's other large holdings, Chevron offers a premium dividend, and its board recently authorized an up to $75 billion share-repurchase program. 

Coca-Cola: $25.2 billion (7.3% of invested assets)

Consumer staples stock $Coca-Cola(KO)$ is the fourth-largest holding by market value in Buffett's portfolio. It's also the longest continuously held stock by Berkshire Hathaway (since 1988).

Despite falling to the No. 4 spot in sector weighting within Berkshire's portfolio, consumer staples is a sector Buffett tends to gravitate toward. No matter how poorly the U.S. economy performs, consumers still need to buy food, beverages, detergent, toothpaste, toilet paper, and a number of other goods and services. Consumer staples stocks won't deliver jaw-dropping growth, but they can safely move the needle higher over the long run if they have strong brands in tow.

When 2022 came to a close, Coca-Cola had 26 separate brands generating at least $1 billion in annual worldwide sales. The company was also operating in all but three countries worldwide (Cuba, North Korea, and Russia). Having a diverse beverage portfolio and being able to generate predictable cash flow in developed markets while enjoying higher organic growth prospects in emerging markets is a winning formula.

Coca-Cola's marketing is yet another reason Buffett remains enamored with the company. More than half of Coke's marketing budget now goes toward digital ads, with the company leaning on artificial intelligence (AI) to tailor and test creative content. However, Coca-Cola has its holiday tie-ins to fall back on, as well, which can help it connect with a more mature audience.

American Express: $24.7 billion (7.2% of invested assets)

The fifth stock that collectively adds up to 76% of Warren Buffett's $344 billion investment portfolio is credit-services company $American Express(AXP)$ . Berkshire Hathaway has been continuously holding shares of AmEx since 1993.

Some of the principles that attracted Warren Buffett and his team to Bank of America can be seen in American Express. Specifically, I'm talking about the cyclical ties.

Perhaps the biggest advantage American Express offers shareholders is its ability to reap rewards from both sides of the aisle. In addition to being the No. 3 payment processor by credit card network purchase volume in the U.S., it also acts as a lender. This allows AmEx to generate fee and interest-income revenue from its cardholders, as well as payment-processing fees from merchants.

While recessions would be expected to take a toll on both facets of its operations, American Express has a secret weapon -- its clientele. AmEx has a knack for attracting high earners.

Individuals and couples with high incomes are less likely to change their buying habits or fail to pay their bills during an economic downturn. This distinction should allow American Express to bounce back from economic hiccups faster than a lot of other lenders.