Buffett isn’t afraid of portfolio concentration when his biggest investments are as wonderful as these companies.
Personal finance experts preach the importance of diversifying your portfolio. Having too much money invested in a single stock opens the door for wild swings in your wealth. One unexpected change in the company, the industry, or government regulations could wipe out a good chunk of your portfolio’s value.
Warren Buffett doesn’t think diversification is always necessary when it comes to constructing a portfolio. He’s gone so far as to say, “Diversification is a protection against ignorance.” In Buffett’s opinion, if you know how to analyze a business, its industry, and its stock, there’s no need to own more than a few wonderful companies.
True to form, Buffett puts his money where his mouth is. A whopping 67.3% of Berkshire Hathaway‘s (BRK.A 1.00%) (BRK.B 0.79%) $361 billion portfolio is invested in just four stocks.
Image source: The Motley Fool.
1. Apple (40.1%)
Apple (AAPL -0.69%) is, by far, the largest holding in Berkshire Hathaway’s equity portfolio. Buffett accumulated shares almost every quarter from the start of 2016 through the third quarter of 2018, resulting in a position equivalent to over 1 billion shares of the stock today. He’s trimmed the position a few times since then, including each of the last two quarters, but Berkshire still holds nearly 800 million shares.
Importantly, despite Buffett’s sales, Berkshire’s stake in Apple hasn’t declined nearly as much thanks to the tech company’s share repurchase program. That’s one of the big reasons Buffett loves the stock so much. Apple has reduced its share count by over 18% since the start of 2019. As a result, despite selling over 20% of its shares, Berkshire’s stake in Apple has only fallen from about 5.4% to about 5.1%. Apple just announced it’s adding $110 billion to its share repurchase authorization.
Of course, there’s a lot to like about Apple besides its massive capital return program supported by steady cash flows. Buffett has praised CEO Tim Cook, and he called Apple “a better business than any we own,” at Berkshire’s 2023 shareholder meeting.
The iPhone may be the most successful consumer product in history. Cook’s ability to leverage the popularity of the device into a growing services business has been a key driver of growing profit margin in the company. It also reinforces the Apple ecosystem, building a bigger moat around the business and ensuring more predictability to Apple’s revenue. Despite Berkshire’s recent sales, Buffett told investors it’s “extremely likely” Apple will remain Berkshire’s largest holding.
2. Bank of America (10.6%)
Buffett bought the bulk of Berkshire’s stake in Bank of America (BAC 0.44%) in 2011. At the time he committed $5 billion to the bank in exchange for preferred shares paying a 6% dividend. But the deal also came with a warrant to purchase 700 million shares for $7.14 each. Buffett made the decision to exercise that warrant in 2017, giving it a 6.8% stake in the company. He subsequently added shares in 2018, 2019, 2020, and 2023, resulting in a 13.1% stake in the business.
Bank of America has struggled recently amid the high interest rate environment. A larger portion of its balance sheet contains long-duration bonds compared to the rest of the industry. As a result, it’s been earning lower interest rates on its holdings while being forced to pay higher interest rates due to the Fed’s interest rate hikes over the past 18 months. That’s seen in its net interest income, which decreased 3% year over year in the first quarter.
Bank of America’s fortunes should turn around, however, as interest rates eventually come down. The near-term reaction of the Fed’s higher-for-longer rhetoric could present an opportunity for investors.
Bank of America has proven to have considerable staying power and is capable of managing through hardships. Despite major setbacks from the 2008-09 financial crisis, the bank has recovered to become one of the biggest retail bankers in the country. Buffett saw this early enough to make a substantial investment. But his continued purchases, especially noteworthy in 2023 amid rising interest rates, indicate he still sees opportunity in Bank of America.
3. American Express (9.7%)
Buffett started buying shares of American Express (AXP 1.32%) in the early 1990s. And similar to Apple, American Express has repurchased a hefty number of shares almost every year. Today, Berkshire’s stake in the credit card issuer is 21.1%. Buffett said he plans to maintain Berkshire’s position in Amex indefinitely in his most recent letter to shareholders.
American Express is a unique business. Unlike other credit card issuers, American Express owns the payment network its payment cards use. So, where banks are heavily reliant on the interest their credit card users pay on their balance, American Express relies on the amount its customers spend on their cards. The company collects a small percentage from merchants for each purchase on its network.
Seventy-six percent of total revenue came from payment processing and annual fees charged to cardholders in the first quarter. That said, a growing portion of Amex’s revenue comes from interest charged on balances. That’s due mostly to shifting target demographics among cardholders.
Still, most of Amex’s cardholders spend more than average and pay their credit card bills in full every month, thanks to its longtime focus on higher-income individuals and small businesses. But with the vast majority of spending coming from consumer cards, it gives it strong protection against an economic slowdown and rising inflation rates, as individuals with higher incomes are less likely to change their spending habits than lower-income households in those situations. Because of its business model, American Express is more susceptible to big changes in consumer spending than other credit card issuers. But the types of card users it attracts make it more protected against loan defaults.
As a perma-bull on the U.S. economy, it’s no wonder Buffett likes American Express’ business model.
4. Coca-Cola (6.9%)
Coca-Cola (KO 0.60%) is one of Berkshire Hathaway’s longest-held equity positions. Buffett’s first purchases date back to 1988 and 1989. Today, Berkshire’s share of the business stands at 9.3%.
Coca-Cola is a classic Buffett investment. Its strong brand and major cost advantages afforded to it by its scale give it a wide economic moat, as Buffett would call it. That is, it has a sustainable competitive advantage that affords it a much wider gross margin than other companies in the industry.
Coca-Cola’s brand strength has been instrumental to its success in recent years amid high inflation. The company’s price/mix increased 13% year over year in the first quarter, helping beat foreign exchange headwinds due to hyperinflation in some markets. As a result, net revenue grew 3% year over year in the quarter.
Meanwhile, the company is taking advantage of its global scale to improve operating efficiency and make the most of its supply chain. It showed meaningful progress in improving operating margin in the first quarter, but there’s still room to improve. Coca-Cola’s global presence and existing relationships with retailers also make it easier for it to introduce new products and enter new verticals, giving it a significant advantage over smaller companies.
Buffett said he wished he’d advised his grandfather to buy Coca-Cola stock back in 1936. Nearly 90 years later, he still thinks it’s a great stock to own.