It's been a challenging year for investors, but as we turn into 2023, it's time to pause and reflect on what investments could work next year. And there are few better places to look than in Warren Buffett's Berkshire Hathaway (BRK.B 0.25%) (BRK.A 0.41%). The legendary investor's portfolio is as concentrated as ever, and unlike most professional money managers, he's not weighting his portfolio in line with the S & P 500 sector weights. Here are three conclusions for investors drawn from looking at Berkshire Hathaway's portfolio vs. the S & P 500.
Berkshire Hathaway versus the S & P 500
Let's start by looking at Berkshire Hathaway's holdings by sector compared to the S & P 500 by sector weighting. Berkshire is overweight in information technology, finance, energy, and consumer staples. It's significantly underweight in consumer discretionary, health care, industrials, telecommunications, utilities, materials, and real estate.
Data source: Berkshire Hathaway SEC filings, S & P Global
1. Don't stress about the Federal Reserve and the interest rate cycle
The first conclusion is that it doesn't look like Buffett is playing the game of trying to guess the Federal Reserve's next move on interest rates. Rightly or wrongly, markets are always volatile in a rate-tightening cycle as the market pores over the minutiae of every utterance of Federal Reserve governors to try and guess the next move in interest rates and the economy.
In such an environment, it's reasonable for money managers to turn defensive and buy into "safe" sectors such as health care, consumer staples, and utilities. However, Berkshire remains underweight in health care and utilities, and the share of the portfolio in consumer staples is lower now than it's been over the last few years.
Meanwhile, the overweight in financials (an interest rate-sensitive sector) remains in place.
All told, there's no hard evidence to suggest Buffett is micro-adjusting his portfolio to guess where interest rates are heading over the near term.
2. Go big on companies you believe in
The overweight position in information technology sticks out a mile. Still, it's down to a considerable position in Apple (AAPL -0.71%), representing around 42% of the overall portfolio at the end of the third quarter. While taking such a "farm bet" on one stock is probably not best suited for investors, the Apple position highlights the benefit of holding stock in a company with a dominant market position and a strategy in place fully take advantage of it.
Apple has a 55% share of the smartphone market in the U.S. and 16% share worldwide. Best known for its iconic hardware products (iPhone, iPad, Macs, Apple watches), Apple is monetizing its brand value by growing its subscription services revenue. Services revenue grew by 14.2% to $78.1 billion in 2022 compared to product sales growth of 6.3% to $316 billion.
The strong business moat and cash-generating potential of increasing services revenue, coupled with a free cash flow yield above 5% (implying Apple could potentially pay a 5% dividend yield and still keep growing is a compelling investment case, and it's enough to make Buffett go big on one stock.
Data by YCharts
3. Oil and gas still has a significant role to play in the economy
Berkshire's overweight position in energy is almost entirely comprised of positions in Chevron (CVX 1.24%) and Occidental Petroleum. Chevron represents over 8% of Berkshire's portfolio (enough to make Berkshire overweight in energy alone). Despite the considerable attraction of its fortress-like balance sheet, downstream (refining and distribution) activities, and investment in lower carbon activities, Chevron is, for now, still essentially a play on the direction of the price of oil.
Data by YCharts
As such, Buffett's overweight position in the stock and the energy sector suggests to investors that oil & gas remains an attractive sector for investors in 2023.
All told, a practical investing framework for 2023 is to avoid being pushed around by speculation over the interest rate cycle, be willing to invest in a well-run business that you believe in, and not be afraid of buying into the energy sector.
