For more than a half-century, mirroring Warren Buffett's investment activity has made investors richer. Since ascending to the CEO chair at Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%), the aptly named "Oracle of Omaha" has overseen a cumulative return in his company's Class A shares (BRK.A) of more than 5,400,000%, as of the closing bell on Sept. 13!
What's particularly great about Warren Buffett's investing philosophy is that he's more than willing to share the traits he looks for in so-called "wonderful companies." The characteristics Buffett craves are sustainable moats/competitive advantages, strong management teams, and time-tested businesses that often have exceptional capital-return programs.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But the one factor that doesn't get nearly enough credit for Berkshire Hathaway's long-term outperformance is the Oracle of Omaha's penchant for portfolio concentration. Even though Buffett is currently overseeing a 43-stock, $309 billion investment portfolio (not including exchange-traded funds), the lion's share of his company's invested capital has been put to work in his best ideas.
Out of Berkshire's $309 billion of invested assets, roughly 53% can be traced to just three unstoppable stocks.
Apple: $89 billion (28.8% of invested assets)
Despite Buffett being a net-seller of more than 500 million shares of tech goliath Apple (AAPL -1.32%) over the last three quarters, the 400 million shares of Wall Street's largest publicly traded company still owned by Berkshire Hathaway equates to almost 29% of invested assets.
During Berkshire Hathaway's annual shareholder meeting in May, Buffett suggested that corporate tax rates were liable to increase in the future, and hinted at this thesis as his reasoning for selling a significant stake in Apple. In other words, he believes investors will, over time, appreciate locking in outsized unrealized gains in Apple at a favorably low tax rate.
But make no mistake about it, the Oracle of Omaha still believes Apple is a fantastic business and has plenty of faith in its CEO Tim Cook.
Apple is easily one of the most-recognized and strongest brands in the world. Minimal marketing is needed when consumers line up in front of its stores, or rush to their laptops or smartphones to place pre-orders, for the company's latest devices.
The thing investors should know about Apple is that it's much more than just a company that develops physical products. Although the iPhone is still its top revenue driver, Tim Cook has been overseeing a multiyear shift toward subscription services. A subscription-focused platform should produce higher margins, improve customer loyalty even more, and smooth out the revenue hills and valleys often observed during major iPhone upgrade cycles.
I'd be remiss if I didn't also mention Apple's market-leading share repurchase program. Since the start of 2013, Apple has bought back approximately $700 billion worth of its common stock and reduced its outstanding share count by 42.2%. This has incrementally increased Berkshire Hathaway's ownership stake in Apple, as well as provided a hearty lift to Apple's earnings per share.
Image source: American Express.
American Express: $39.3 billion (12.7% of invested assets)
The second-largest holding in the $309 billion portfolio the Oracle of Omaha oversees at Berkshire Hathaway is credit-services goliath American Express (AXP -0.97%). AmEx is Berkshire's second longest-tenured holding (since 1991).
The reason Warren Buffett tends to gravitate to financials (his favorite sector) is because they're cyclical. Even though Buffett is well aware that recessions are a normal part of the economic cycle, he wisely understands that downturns resolve quickly. Three-quarters of the 12 U.S. recessions since the end of World War II failed to endure for 12 months. Comparatively, two periods of growth surpassed the decade mark, with most expansions sticking around for multiple years.
American Express is a company that's built to thrive during disproportionately long periods of growth.
Furthermore, AmEx benefits from both sides of the transaction aisle. It's the No. 3 payment processor by credit card network purchase volume in the U.S., which means it's generating predictable fees from merchants when facilitating payments. But it's also a lender. The personal and business credit cards AmEx issues allow it to collect annual fees and generate interest income. Being able to double-dip on both sides of a transaction has helped AmEx grow into the behemoth it is today.
Another key factor for American Express has been its ability to court high-earning clientele. Compared to the average-earning consumer, high earners are less likely to demonstrably alter their spending habits or fail to pay their bills during economic disruptions. On paper at least, AmEx appears better suited than most lenders to navigate a U.S. recession.
With Berkshire's cost-basis in AmEx an ultra-low $8.49 per share, it should be noted that American Express's base annual payout of $2.80 per share equates to an annual yield on cost of 33% for Buffett's company. In short, Buffett is seeing his initial investment in AmEx double about every three years on dividend income alone.
Bank of America: $33.2 billion (10.7% of invested assets)
The third-largest holding that, in addition to Apple and American Express, collectively accounts for about 53% of Berkshire Hathaway's invested assets is Bank of America (BAC -0.47%), which is better-known as "BofA."
This longtime top holding for Berkshire Hathaway has been in the spotlight of late. Thanks to required Form 4 filings with the Securities and Exchange Commission, we know that Buffett has sold a grand total of almost 174 million shares of BofA in 27 of the last 39 trading sessions, dating back to July 17.
This selling activity could be completely benign or potentially worrisome. For instance, tax-related selling (similar to the reasoning given for ringing the register on shares of Apple) wouldn't be much of a concern. However, Buffett may also be building a mammoth cash position at his company because he believes the stock market is historically pricey.
The primary lure to bank stocks, as discussed earlier, is that they're cyclical. Non-linear economic cycles allow banks to grow their loan portfolios over time and generate progressively higher fees and interest income.
Bank of America just happens to be the most interest-sensitive of America's largest banks by assets. The 525-basis-point increase in the federal funds rate from March 2022 through the present has lifted its net interest income by billions of dollars every quarter. But with the Fed expected to kick off a rate-easing cycle this week, there remains a distinct possibility that BofA's bottom line could be harmed more than any other bank stock for the foreseeable future.
Something else to keep in mind is that Berkshire's stake in Bank of America has fallen to 11.1% of BofA's outstanding shares. If this stake should dip below 10%, the Oracle of Omaha will no longer be required to lift the hood on every transaction. Instead, investors will have to wait until quarterly 13Fs are filed to get the full details of what he and his investment team have been up to.
