Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, believes in putting big chunks of capital into his highest-conviction ideas.
An analysis of Berkshire’s equity portfolio reveals that just 4 stocks – Apple, Bank of America, American Express, and Coca-Cola – account for a whopping 71% of the portfolio’s total value of $357 billion.
With his astute capital allocation and long-term investing approach, Buffett has delivered mind-blowing returns for Berkshire Hathaway shareholders.
Since taking over as CEO in 1965, Buffett has grown Berkshire’s per-share book value at a 20.1% annual pace, exponentially outpacing the S&P 500.
Let’s take a closer look at each of Buffett’s 4 largest holdings and the investment thesis behind them.
1. Apple – $173.7 Billion, 48.6% of Portfolio
At the top spot is tech giant Apple, which Buffett has called “a better business than any we own” – high praise considering Berkshire’s portfolio includes powerhouses like GEICO and BNSF Railway.
Berkshire’s Apple stake was worth nearly $174 billion as of December 31, 2022, accounting for close to half of the equity portfolio.
So why does the Oracle of Omaha love Apple so much? For starters, Apple enjoys unmatched brand loyalty – with around 90% of iPhone users sticking with Apple for their next smartphone purchase according to CIRP.
Buffett also sees Apple as an innovation machine under CEO Tim Cook, with the company expanding into subscription services on top of its industry-leading devices.
Most importantly, Apple is a prodigious capital returner, having repurchased over $600 billion of its own stock over the past decade. These repurchases steadily increase Berkshire’s ownership stake in the tech titan over time.
With Apple aggressively reducing share count while simultaneously growing earnings, it’s a formula for success that Buffett can’t resist.
2. Bank of America – $31 Billion, 8.7% of Portfolio
Coming in second is banking giant Bank of America, representing nearly $31 billion of Berkshire’s total equity portfolio. Buffett has always loved bank stocks, and the current rising interest rate environment provides a strong tailwind to the sector. Among the big banks, BofA is the most interest rate-sensitive, benefiting disproportionately from Fed rate hikes.
On top of that macro tailwind, Bank of America has done an excellent job managing expenses through digitalization, shuttering branches, and promoting online/mobile banking.
Trading at 9.8 times forward earnings and 0.9 times book value, BofA stock provides the value that Buffett eagerly seeks. With a 3.3% dividend yield, income investors are rewarded too as they wait for Buffett’s thesis to play out.
3. American Express – $24.6 Billion, 6.9% of Portfolio
In the 3rd spot is credit card leader American Express, representing close to $25 billion of Berkshire’s portfolio as of year-end 2022. Like Bank of America, AmEx profits from long periods of economic expansion in the U.S.
The company plays both sides of transactions, generating fees from merchants and interest income from cardholders.
Importantly, AmEx customers tend to be high earners who keep spending even during minor consumer weakness. This provides resilience not seen in other lenders.
Berkshire has held AmEx stock for over 30 years, collecting a 28.3% yield on its cost basis along the way. With a 0.9% dividend and buybacks lifting EPS over time, it’s easy to see why Buffett loves this financial services giant.
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4. Coca-Cola – $22.9 Billion, 6.4% of Portfolio
Rounding out the top 4 is beverage titan Coca-Cola, Buffett’s longest-held stock with an uninterrupted position size since 1988. The Oracle of Omaha loves Coke stock for its recession-proof nature as a consumer defensive, along with its world-renowned brand and global diversification.
Coca-Cola products are consumed nearly 6 billion times per year worldwide, exemplifying unmatched consumer loyalty.
Coke also checks the box for Buffett with over six decades of consecutive annual dividend growth. Berkshire enjoys a sky-high 57% yield on its original cost basis, providing tremendous income for the conglomerate to reinvest across its vast operations.
For an investor obsessed with high-quality businesses and dividend payers, it’s easy to comprehend Buffett’s enduring affection for Coca-Cola stock after 35 years of ownership.
The Key Takeaway on Buffett’s Concentrated Approach
There’s an important lesson here about taking a concentrated approach and letting your highest conviction picks drive outsized performance, as Buffett has successfully executed for decades.
Berkshire Hathaway’s equity portfolio spans 51 securities, yet just 4 companies collectively make up 71% of the invested assets.
When you focus your investing dollars into those businesses you know best and that possess durable competitive advantages, outsized returns can follow over long time horizons.
As Warren Buffett has shown, portfolio concentration – not diversification – is the key to life-changing wealth creation for those with patience, discipline, and diligent research.