Personal finance experts preach the importance of diversifying your portfolio. Investing too much money in one stock opens the door to wild swings in your wealth. One unexpected change in corporate, industry or government regulations could wipe out a large portion of the value of your portfolio.
Warren Buffett doesn’t think diversification is always necessary when it comes to building a portfolio. He has even gone so far as to say, “Diversification is a defense against ignorance.” According to Buffett, if you know how to analyze a company, its sector and its stocks, there is no need to own more than a few great companies.
True to form, Buffett puts his money where his mouth is. No less than 67.3% of Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) A $361 billion portfolio is invested in just four stocks.
1. Apple (40.1%)
Apple (NASDAQ: AAPL) is by far the largest holding in Berkshire Hathaway’s stock portfolio. Buffett accumulated shares almost every quarter from the start of 2016 through the third quarter of 2018, resulting in a position equivalent to more than 1 billion shares today. He’s cut the position a few times since then, including each of the last two quarters, but Berkshire still owns nearly 800 million shares.
Importantly, despite Buffett’s sales, Berkshire’s stake in Apple hasn’t fallen nearly as much thanks to the tech company’s stock buyback program. That’s one of the main reasons why Buffett loves the stock so much. Apple has reduced its share count by more than 18% since the beginning of 2019. As a result, despite selling more than 20% of its shares, Berkshire’s stake in Apple has only fallen from about 5.4% to about 5.1%. Apple just announced it is adding $110 billion to its share repurchase authorization.
Of course, there’s a lot to like about Apple, besides its massive capital return program, backed by steady cash flows. Buffett has praised CEO Tim Cook, calling Apple “a better company than any company we own” at Berkshire’s 2023 shareholder meeting.
The iPhone is perhaps the most successful consumer product in history. Cook’s ability to leverage the device’s popularity in a growing services business has been a key driver of the company’s growing profit margin. It also strengthens the Apple ecosystem, building a larger moat around the company and providing more predictability to Apple’s revenues. Despite Berkshire’s recent sales, Buffett told investors it is “very likely” Apple will remain Berkshire’s largest holding.
2. Bank of America (10.6%)
Buffett bought back most of Berkshire’s shares bank of America (NYSE: BAC) in 2011. At the time, he pledged $5 billion to the bank in exchange for preferred stock with a 6% dividend. But the deal also came with a warrant to buy 700 million shares at $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 company.
Bank of America has been struggling lately in the high interest rate environment. A larger part of the balance sheet contains long-term bonds compared to the rest of the sector. As a result, the country has received lower interest rates on its investments while being forced to pay higher interest rates as a result of the Fed’s rate hikes over the past eighteen months. This is evident from net interest income, which fell 3% year on year in the first quarter.
However, Bank of America’s fortunes should turn around if interest rates eventually fall. The short-term response to the Fed’s “higher for longer” rhetoric could present an opportunity for investors.
Bank of America has proven to have significant staying power and the ability to weather hardships. Despite the major setbacks of the 2008-2009 financial crisis, the bank has recovered to become one of the country’s largest retail bankers. Buffett saw this early enough to make a substantial investment. But his continued purchases, especially notable in 2023 against the backdrop of rising interest rates, indicate he still sees opportunity in Bank of America.
3. American Express (9.7%)
Buffett started buying shares of American Express (NYSE:AXP) early nineties. And like Apple, American Express has bought back a significant number of shares almost every year. Today, Berkshire’s stake in the credit card company stands at 21.1%. In his most recent letter to shareholders, Buffett said he plans to maintain Berkshire’s position in Amex indefinitely.
American Express is a unique company. Unlike other credit card issuers, American Express owns the payment network its payment cards use. So while banks rely heavily on the interest their credit card users pay on their balances, American Express relies on the amount its customers spend on their credit cards. The company collects a small percentage from sellers 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. This is mainly due to the shifting target group among cardholders.
Still, most Amex cardholders spend more than average and pay their credit card bills in full each month, thanks to its longstanding focus on higher-income individuals and small businesses. But since the vast majority of spending comes from consumer cards, it provides strong protection against an economic slowdown and rising inflation rates, because higher-income individuals are less likely to change their spending habits in such situations than lower-income households. Because of its business model, American Express is more sensitive to major changes in consumer spending than other credit card issuers. But the kind of card users it attracts makes it better protected against loan defaults.
As a permanent bully for the US economy, it is no wonder that Buffett likes the American Express business model.
4. Coca-Cola (6.9%)
Coca-Cola (NYSE: KO) is one of Berkshire Hathaway’s longest-held stock holdings. Buffett’s first purchases date back to 1988 and 1989. Today, Berkshire’s share of the company stands at 9.3%.
Coca-Cola is a classic investment by Buffett. The strong brand and the large cost advantages it gets from its scale give the company a wide economic moat, as Buffett would call it. That is, it has a sustainable competitive advantage that gives it a much larger gross margin than other companies in the industry.
The strength of the Coca-Cola brand has played a major role in Coca-Cola’s success in recent years, despite high inflation. The company’s price/mix rose 13% year-over-year in the first quarter, offsetting currency headwinds from hyperinflation in some markets. As a result, net sales grew 3% year over year in the quarter.
Meanwhile, the company is taking advantage of its global scale to improve operational efficiency and get the most out of its supply chain. It showed significant progress in improving operating margin in the first quarter, but there is still room for improvement. Coca-Cola’s global presence and existing relationships with retailers also make it easier for Coca-Cola to introduce new products and enter new industries, giving it a significant advantage over smaller companies.
Buffett said he wished he had advised his grandfather to buy Coca-Cola stock in 1936. Nearly ninety years later, he still thinks it’s a great stock to own.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions at Apple. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
67.3% of Warren Buffett’s $361 Billion Portfolio Is Invested in Just Four Stocks, originally published by The Motley Fool
