Though there are a lot of great money managers, few can hold a candle to the Oracle of Omaha, Warren Buffett. Since becoming CEO of Berkshire Hathaway (BRK.A 0.01%) (BRK.B 0.13%) in 1965, Buffett has overseen the creation of more than $680 billion in shareholder value and delivered an aggregate return on his company’s Class A shares (BRK.A) of better than 3,600,000%.
While there is a long list of reasons for Buffett’s success, one of the most overlooked catalysts is portfolio concentration. Despite having more than $345 billion invested in around four dozen securities, 93% of Warren Buffett’s portfolio can be traced to just four sectors.
Technology: 44.18% of invested assets
Although Buffett’s company owns a half-dozen tech stocks, it’s Apple (AAPL 0.59%) that accounts for the lion’s share of Berkshire Hathaway’s investment portfolio. As of this past weekend, Apple made up 40% of Berkshire’s invested assets.
What makes Apple so special is its dominance in a variety of categories. It’s widely regarded as the world’s most valuable brand, and it has an exceptionally loyal customer base. Within the U.S., the company’s iPhone accounts for more than half of all smartphone market share.
Beyond the physical products that brought the company fame, Apple CEO Tim Cook is leading a multiyear shift that’s designed to promote subscription services. For Apple, subscription services should be a higher-margin segment that leads to predictable quarterly cash flow. In short, it’s a way to mitigate revenue fluctuations tied to physical product replacement cycles.
The other intriguing investment within tech is Buffett’s newest: Taiwan Semiconductor Manufacturing Company (TSM -0.69%), which is better known as TSMC. What makes this a seemingly no-brainer investment for Buffett is TSMC is the exclusive supplier of silicon processing chips used in Apple’s products. If the Oracle of Omaha and his investment team expect Apple to outperform over the long run, it’s only logical that its chip supplier would benefit, too.
Financials: 24.08% of invested assets
Without question, the least surprising aspect of Berkshire Hathaway’s portfolio is that financial stocks play a key role. As of the end of last week, Buffett’s company was invested in 17 financial securities (this includes two exchange-traded funds) that equated to about $83.3 billion in market value.
The reason Buffett loves putting Berkshire’s money to work in financial stocks is that they get the benefit of time as an ally. Despite recessions being a regular part of the economic cycle, periods of expansion last considerably longer than recessions. Owning an assortment of banks, insurers, and payment providers allows Berkshire Hathaway to take advantage of the natural expansion in U.S. and global gross domestic product — as well as consumer and enterprise spending — over time.
The largest financial in Berkshire’s investment portfolio is Bank of America (BAC 0.32%). At the moment, BofA’s interest rate sensitivity is its biggest catalyst. No large bank stock will see its net interest income fluctuate more with changes to the yield curve than Bank of America. Considering that the Federal Reserve has no choice but to aggressively raise rates in order to tame historically high inflation, BofA is set to generate billions of dollars in added net interest income.
Credit-services provider American Express (AXP -0.42%) is another large and longtime holding. The beauty of AmEx’s operating model is that the company is able to double dip during periods of expansion. In addition to bringing in merchant fees, it also collects interest income and cardholder fees as a lender.
Energy: 12.99% of invested assets
Prior to 2022, energy stocks hadn’t accounted for more than 8.9% of Warren Buffett’s investment portfolio at any point this century. But that’s changed in a big way, with energy stocks accounting for nearly 13% of invested assets as of this past week.
The real jaw-dropper is that the $44.9 billion Buffett and his team have apportioned to “energy stocks” are tied up in just two companies: Chevron (CVX -0.89%) and Occidental Petroleum (OXY -2.27%). Berkshire Hathaway also holds $10 billion in preferred stock of Occidental Petroleum that yields 8% annually. This $10 billion isn’t included in the $44.9 billion figure.
The only reason the Oracle of Omaha would make this bet is if he believed crude oil and natural gas prices would head higher or remain well above their historical average — and there’s certainly reason to believe that’ll be the case. The pandemic forced most drilling, exploration, and energy infrastructure companies to significantly pare back their investments. When coupled with Russia invading Ukraine in February, it creates a situation where increasing the global oil and gas supply to meet growing demand becomes difficult. It’s a simple situation of demand outpacing supply, with oil and natural gas prices heading higher as a result.
Additionally, Chevron and Occidental Petroleum are both integrated operators. Although drilling provides the best margins for oil and gas companies, integrated operators can lean on midstream assets, such as pipelines, or downstream assets, like refineries and chemical plants, if energy commodity prices fall.
Consumer staples: 11.38% of invested assets
The fourth sector that makes up a sizable portion of Warren Buffett’s portfolio is consumer staples. Interestingly, though, the 11.38% weighting, as of last week, would be a low point this century.
The lure of consumer staples stocks is the predictability of their cash flow and profit potential. No matter how poorly the U.S. economy or stock market performs, people still need to purchase food, beverages, detergent, toothpaste, toilet paper, and so on. This is what makes this sector so appealing during periods of uncertainty, such as we’re experiencing now.
Warren Buffett’s longest-held stock, Coca-Cola (KO 0.45%), is a consumer staple. Coca-Cola is one of the most recognized brands in the world, which is a testament to its stellar marketing and its ability to cross generational gaps to engage with consumers.
Furthermore, Coca-Cola is about as geographically diversified as businesses get. With the exception of North Korea, Cuba, and Russia (the latter is due to its invasion of Ukraine), Coke has ongoing operations in every other country right now. This helps it take advantage of predictable cash flow in developed markets, as well as higher organic growth rates in emerging markets.
But it is worth noting that, with the exception of grocery chain Kroger, Buffett’s company has shied away from buying consumer staple stocks in recent years. This could be an indication that Buffett’s investing lieutenants, Todd Combs and Ted Weschler, are playing a bigger role in Berkshire Hathaway’s investments. Combs and Weschler have demonstrated a larger appetite for risk-taking when compared to Warren Buffett.
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 Apple, Berkshire Hathaway (B shares), and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.