In 1965, Warren Buffett became CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) and began a remarkable streak of outperformance, relative to Wall Street’s benchmark stock indices. Over nearly six decades, he has overseen a cumulative return in his firm’s Class A shares (BRK.A) of more than 5,700,000%!
Money managers running laps on Wall Street usually attract a lot of attention. But when you deliver a gain of over 5,700,000%, investors will pay attention to your every word and possibly mirror your buying and selling activity.
What’s interesting about the Oracle of Omaha’s success is that he’s largely been an open book about the qualities he looks for in investments. For example, Buffett frequently looks for proven companies with identifiable competitive advantages and strong management teams that can be retained for years, if not decades. He’s also a big proponent of concentrating his company’s invested assets in his best ideas.
However, not all of the 45 stocks in Berkshire Hathaway’s roughly $318 billion investment portfolio share the same outlook. While “years” is the typical holding period for a stock in Berkshire’s portfolio, Warren Buffett’s last annual letter to shareholders outlined eight stocks that were designated “indefinite” holdings.
As you might imagine, you’d expect top investment ideas to stick around for a long time. These eight forever holdings currently represent a whopping 34% ($106.5 billion) of Berkshire Hathaway’s invested assets.
No. 1: American Express, $39.2 billion (12.3% of invested capital)
After selling approximately 150 million shares of Bank of America since mid-July by Buffett and his team, credit services provider American Express (NYSE: AXP) has risen to the second-largest market capitalization in Berkshire’s portfolio. “AmEx,” as the company is better known, has been a continuous asset of Buffett’s company since 1991.
Financials are the Oracle of Omaha’s favorite sector, largely because they’re cyclical. Buffett and his top investment advisors, Todd Combs and Ted Weschler, are fully aware that recessions are a normal and inevitable part of the economic cycle. Instead of throwing darts and trying to guess when these downturns will occur, they rely on a numbers game that works undeniably in their favor.
In the 79 years since the end of World War II, there have been a dozen recessions in the U.S., and all but three resolved in less than 12 months. By comparison, nearly every expansion lasted several years, with two expansions that topped the 10-year mark. The bet that the U.S. economy and consumer/business spending would grow over long periods of time was a stroke of genius.
American Express also benefits from both sides of the transaction counter. In the U.S., it is the third-largest payment processor by credit card network purchase volume, which allows it to collect fees from merchants. However, it also generates fees and interest income from its line of credit cards.
Also, remember that AmEx can attract high earners. High-income cardholders are less likely to adjust their spending or default on their bills during minor economic disruptions.
No. 2: Coca-Cola, $29 billion (9.1% of invested capital)
The only permanent investment that has been in Berkshire Hathaway’s portfolio longer than AmEx is beverage giant Coca Cola (NYSE: KO)which has been held continuously since 1988.
Berkshire’s cost basis in Coca-Cola is just $3.2475 per share, which represents a nearly 60% return on cost, based on Coke’s annual payout of $1.94 per share. In other words, Buffett sees his initial investment in Coca-Cola more than double just from dividend income every two years.
One reason Coca-Cola is such a great company is because it has a consumer base. It provides a good (beverages) that consumers need no matter how well or poorly their country’s economy is doing. This leads to very predictable operating cash flow year after year.
When it comes to consumer goods companies, you’d be hard-pressed to find a company with better branding than Coca-Cola. In Kantar’s annual “Brand Footprint” report, Coca-Cola was named the most popular brand on store shelves by consumers for the 12th year in a row. This is a testament to its long history as a publicly traded company, and its ability to connect with adult and youth audiences through a combination of brand ambassadors and digital media.
Furthermore, Coca-Cola’s geographic diversity is virtually unmatched. In addition to having more than two dozen brands that generate at least $1 billion in annual sales, the company has operations in every country except Cuba, North Korea and Russia. Coca-Cola is able to generate meaningful cash flow in developed countries while simultaneously moving the needle of organic growth in emerging markets.
No. 3: Occidental Petroleum, $14.5 billion (4.6% of invested assets)
While it has been known for some time that AmEx and Coca-Cola are unspecified holdings for Warren Buffett, the addition of integrated oil and gas stocks Occidental Petroleum (NYSE: OXY) in his annual letter to shareholders published in February was a source of surprise.
The Oracle of Omaha and his team began buying shares of Occidental in the first quarter of 2022. Since then, Berkshire’s stake in the company has grown to nearly 255.3 million shares, or about 27.3% of Occidental’s outstanding shares. Buffett has received permission from U.S. regulators to buy up to 50% of Occidental’s shares, but he has no interest in buying the company outright.
Since Warren Buffett is a big advocate of never betting against America, his best bet is on the growing demand for energy commodities, such as oil.
One of the more interesting catalysts for Occidental is the global crude oil supply squeeze. Roughly three years of significant capital spending cuts by global energy giants during the COVID-19 pandemic has left the industry playing catch-up. When the supply of a sought-after commodity is tight, that tends to drive up its price.
Few integrated oil and gas companies generate a higher percentage of their revenues from drilling than Occidental. If the spot price of crude oil remains high or rises further, Occidental should have an outsized benefit to its operating cash flow. Be warned, however, that a reciprocal event (i.e., a decline in the spot price of crude oil) would have a more negative impact on its cash flow than other integrated energy companies.
No. 4 to No. 8: The five Japanese trading houses, $23.7 billion (combined) from Mitsubishi (2.3% of invested assets), Itochu (2%), Mitsui (1.7%), Marubeni (0.8%) and Sumitomo (0.7%)
The other group of stocks Buffett touted as perennial investments in his latest annual letter to shareholders are Japan’s five largest trading houses: Mitsubishi (OTC: MTSU.Y)(OTC: MSBHF), Itochu (OTC: ITOCY)(OTC: ITOCF), Mitsui (OTC: MITSY)(OTC: MITSF), Marubeni (OTC: MARUY)(OTC: MARUF)And Sumitomo (OTC: SSUM.Y)(OTC: SSUM.F).
You might be wondering why some of the companies Buffett holds so highly represent less than 1% of Berkshire’s invested assets. The simple reason is that Buffett and his team have agreed to buy no more than 9.9% of the shares in these five Japanese trading houses. These five holdings currently range from 7.5% (for Itochu) to 8.6% (for Mitsubishi) of the outstanding shares.
One of the likely reasons why the Oracle of Omaha favors these five companies as unspecified holdings is because they are deeply rooted in the Japanese economy. Mitsubishi, Itochu, Mitsui, Marubeni, and Sumitomo are involved in oil and gas operations, food production, mining, renewable energy, chemicals, and so on. The list of what these companies have their fingers in could be a book in itself. If an investor believes that the Japanese economy will grow in the long run, these trading houses are a no-brainer buy.
Valuation is another major lure for the five Japanese trading houses. The stock market is historically expensive right now, and has been for most of the past decade. The Japanese trading houses have low price-earnings ratios and generally robust capital return programs.
Furthermore, the management teams of these five companies receive relatively low compensation packages. This means that the focus is on shareholder returns, something Warren Buffett values greatly.
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Bank of America and American Express are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
34% of Warren Buffett’s $318 Billion Portfolio Is Invested in These 8 ‘Forever’ Stocks was originally published by The Motley Fool
