The Oracle of Omaha isn’t a big fan of diversification.
Sean Williams (TMFUltraLong)
Warren Buffett’s investing credentials speak for themselves. Between the mid-1950s and October 2019, Buffett took roughly $10,000 in seed capital and turned it into a net worth of about $80 billion, all while generating in excess of $400 billion in value for investors who’ve purchased Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) stock. There’s a very good reason Buffett is often referred to as the Oracle of Omaha.
But one of the more interesting aspects of Buffett’s investing style is that he isn’t particularly diversified. Buffett has always approached investing with the mind-set that he would study the ins and outs of a handful of industries and sectors, then buy companies in those niches. As his investing history suggests, he’s done quite well.
A quick glance at Buffett’s investment portfolio shows that a little more than 87% of the $211 billion in stock holdings via Berkshire Hathaway (as of Wednesday, Oct. 9) can be attributed to just three sectors of the market.
Financials: 45.5% of Buffett’s portfolio
Anyone who’s ever followed Buffett’s investing strategy probably knows he’s had an affinity for financial stocks, such as money center banks and insurance companies, for a long time. But you may not have realized just how significant a role they play in his portfolio. Right now, more than $96 billion is tied up in 15 different finance stocks, equating to 45.5% of invested assets.
Furthermore, when the second quarter ended, financials accounted for 47.37% of invested assets, marking the highest concentration in the sector since the third quarter of 2006.
So, why does Buffett gravitate to this sector? The simple answer is that it makes money hand over fist. These are traditionally businesses that don’t require top-notch management teams to be successful. And since the U.S. economy spends far more time expanding than contracting, and financial stocks are usually cyclical, Buffett’s financials are seeing their bottom lines expand more often than not.
Berkshire’s largest holding here is Bank of America (NYSE:BAC), with 950 million shares owned, worth $26.5 billion. Over the past decade, Bank of America has made a number of adjustments to its business model. It’s closed some of its physical branches to reduce its operating expenses and reach a digital-focused younger consumer, and has benefited from modestly higher interest rates in recent years. Bank of America arguably has the most interest-sensitive asset portfolio among money center banks.
Insurance companies like Travelers (NYSE:TRV) also play their role for Buffett. Berkshire owns an $842 million stake in Travelers at the moment. The thing to realize with insurers is that catastrophe expensing is inevitable. This realization is what allows them to pass along higher premiums to consumers during both periods of low and high catastrophe expensing. Typically, that’s a formula that should allow Travelers to grow its bottom line by 5% or more per year.
Information technology: 26.8% of Buffett’s portfolio
What might be most surprising is that more than a quarter of the value of Buffett’s portfolio is concentrated in information technology. Buffett has generally avoided tech stocks throughout his many years of investing — and when he has dabbled in the tech arena, it hasn’t always been pretty (ahem, IBM).
However, when I say “information technology,” what I really mean is Apple (NASDAQ:AAPL). Until the second quarter, Berkshire Hathaway owned both Apple and Red Hat. However, Red Hat was purchased by IBM in a cash deal, leading to Berkshire no longer owning any other tech stocks, save for Apple. Buffett’s current investment in Apple is nearly 249.6 million shares, equating to a 5.5% stake worth a staggering $56.7 billion. That’s a 26.8% stake of Buffett’s portfolio tied up in a single stock.
Of course, Apple isn’t your run-of-the-mill dart throw, by any means. It’s currently vying with Microsoft for the title of “largest publicly traded company in the world,” and is sitting on the largest cash pile of any publicly traded company: $210.6 billion. It’s also been a leading innovator over the past 10-plus years, with both hardware and services driving growth.
Next year, the plan is for Apple to introduce a redesigned iPhone that’s 5G-capable, which will give wireless providers plenty of time to expand 5G coverage. This should encourage consumers to upgrade their smartphones and will, likely, push iPhone sales back above 50% of total company revenue late next year.
Apple has also seen extensive growth in wearables and services. The company is on the verge of launching Apple TV, and has been gaining global streaming market share with its Music service. Suffice it to say that Buffett really likes his company’s investment in Apple.
Consumer staples: 14.9% of Buffett’s portfolio
A third sector that garners significant weight in Buffett’s portfolio is consumer staples. However, it’s worth noting that Buffett had more than 40% of Berkshire’s investment money tied up in consumer staples as recently as the third quarter of 2011. At just 14.9%, this is the smallest percentage of Berkshire’s portfolio that consumer staples have ever occupied, dating back to 2001.
The beauty of consumer staple companies, as the name implies, is that they sell products that are high on consumers’ shopping lists. Regardless of whether the economy is strong or contracting, there’s little chance that consumers are going to change their buying habits. This makes the sales and cash flow for consumer staples very predictable, and it typically means that they possess reasonably strong pricing power.
The most notable consumer staple in Buffett’s portfolio is Coca-Cola (NYSE:KO), which Buffett has held for more than 30 years. Coca-Cola has a presence in all but one country around the world (North Korea), giving it unsurpassed geographic revenue diversity. This is also a company with 21 brands worldwide that are currently generating in excess of $1 billion in annual sales. The stability of Coca-Cola’s cash flow and the recognition of its brand worldwide have all played a role in the company boosting its annual dividend for an impressive 57 consecutive years.
Although consumer staples aren’t going to knock investors’ socks off from a growth perspective, they’re difficult to top in terms of stability and bottom-line expansion.