Key Points
- Since 1965, Warren Buffett has delivered a staggering 3,787,464% return for his company’s Class A shares (BRK.A).
- Buffett’s investment philosophy emphasizes focused bets on a few high-quality companies, rather than broad diversification.
- As of the latest disclosure, Berkshire Hathaway has allocated 68% of its invested assets to just four well-known names.
If you’ve ever wondered why investors closely monitor the buying and selling decisions of Warren Buffet, CEO of Berkshire Hathaway, here’s why: Since taking on the role in 1965, he has generated over $680 billion in value for the company’s shareholders (including himself) and delivered an impressive aggregate return of 3,787,464% on Berkshire’s Class A shares (BRK.A). This is 153 times better than the widely followed S&P 500’s total return, which is 24,708% including dividends paid, over the same period.
Investors are eager to replicate even a fraction of Buffet’s outperformance by closely examining his investment strategy. While many of his investing traits are known, such as buying for the long term and investing in dividend stocks, his portfolio concentration has been the key to his success. Warren Buffet believes diversification is only necessary if you don’t know what you’re doing, and as a result, a staggering 68% of Berkshire Hathaway’s $334 billion investment portfolio is invested in only four stocks.
1. Apple: $138.3 billion (41.4% of invested assets)
In the previous year’s shareholder letter, Berkshire Hathaway’s CEO, Warren Buffett, described Apple as one of the “four giants” of the company. With over 41% of its invested assets tied up in Apple, it’s safe to say that the tech behemoth deserves the label.
Although Apple’s high growth phase has ended, the company is still a major player in the tech industry, fueled by its innovative products and strong cash flow. Its physical products have been a hit with consumers for more than a decade, with the launch of the 5G-capable iPhone in Q4 2020 allowing it to capture half of the U.S. smartphone market share.
Apple’s Mac personal computers have also been gaining momentum, with global PC shipment shares surging to more than 17% in late 2022 from the usual 11% to 13% over the past nine years.
Buffett and his team appreciate Apple’s management, particularly CEO Tim Cook’s efforts to shift the company’s focus to subscription services, which tend to have high margins and help stabilize revenue fluctuations during product upgrades.
Moreover, Apple’s capital-return program is something that Buffett admires. Over the past decade, Apple has bought back over $550 billion of its shares and is currently offering one of the world’s largest nominal-dollar dividends.
2. Bank of America: $35.3 billion (10.6% of invested assets)
Financials are one of Warren Buffett’s favorite sectors to invest in, and Bank of America is currently the bank stock that stands out the most in Berkshire Hathaway’s portfolio. Apart from Apple, it’s the only other stock to account for a double-digit percentage of the firm’s invested assets.
One of the main reasons why Buffett and his team like bank stocks are because they are reliable moneymakers, as long as you’re willing to be patient. Despite being cyclical, banks are able to grow their loans and deposits over time, capitalizing on the natural expansion of the US economy.
Bank of America has a secret weapon in its interest rate sensitivity. With the Federal Reserve raising interest rates at the fastest pace in four decades, BofA is among the banks that will benefit the most. The interest rate hikes are increasing the bank’s net interest income by billions of dollars each quarter, and the central bank is not finished raising rates yet.
Although it may seem like a conservative institution, Bank of America is investing heavily in digitization to improve its operating efficiency. During the fourth quarter, nearly half of its total sales were completed online or via mobile app. As more people move to online banking, BofA will have the option to consolidate its physical branches and lower its operating expenses.
Furthermore, bank stocks typically provide handsome rewards to their shareholders during economic expansions. It is not uncommon for Bank of America to return $20 billion or more per year through dividends and share buybacks.
Chevron is one of the newest and largest holdings in Berkshire Hathaway’s portfolio. The oil and gas company has been held by Warren Buffett since the fourth quarter of 2020. The reason for the company’s addition may be the belief that oil prices will remain elevated for years to come, despite Russia’s invasion of Ukraine, which created supply issues for Europe. The bigger catalyst for higher oil prices is the three-year demand uncertainty caused by COVID-19, leading oil and gas companies to cut back on their capital expenditures. As a result, crude oil supply is expected to be constrained for years to come, which should lift the spot price of oil.
Chevron’s integrated operations contribute to its strong cash flow and partially hedge against lower crude oil prices. The company has transmission pipelines, refineries, and chemical plants, which provide steady cash flow. Chevron is also known for having one of the best balance sheets among global energy majors. The company was able to reduce its net debt from $25.7 billion to $5.4 billion in 2022 due to higher energy commodity prices.
Chevron has a long history of increasing its base annual dividend and recently authorized an up to $75 billion share repurchase program.
4. American Express: $27.2 billion (8.1% of invested assets)
One of the four stocks that collectively account for 68% of Berkshire Hathaway’s invested assets is American Express, a credit services provider that has been in Buffett’s portfolio for over 30 years.
Like bank stocks, AmEx benefits from long periods of economic expansion. Its ability to both process payments and lend money allows it to earn fees from merchants and interest from cardholders, making it a double-dipping powerhouse.
Although AmEx is vulnerable during recessions, the company’s target clients are high earners and high-net-worth individuals, who are less likely to change their spending habits or default on their bills during economic downturns. This has helped AmEx weather economic storms in the past.
Moreover, American Express has a solid capital-return program, including a quarterly dividend that equates to a yield of over 28% on Berkshire Hathaway’s exceptionally low-cost basis of $8.49 per share.
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