Whether you’re a Warren Buffett fan or not, there’s no doubt he’s one of the greatest investors of all time. The CEO of conglomerate Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) has grown its net worth since the 1950s from $ 10,000 to $ 80 billion, and has provided a compound annual return for Berkshire Hathaway shareholders of 20.3% since 1965. A $ 100 investment in Berkshire back in 1965 would today worth more than $ 2.5 million.
Buffett’s success is primarily attributed to his ability to find companies with sustainable competitive advantages, as well as his persistence in staying with his holdings over long periods of time.
But this only tells part of the story. Buffett’s outperformance is also a direct reflection of his reluctance to buy into the idea of traditional investment diversification. The Oracle of Omaha does not believe in diversification if you know what you are doing. By hanging out with companies in sectors and sectors he knows very well, Buffett has amassed a long history of outperformance.
As of the closing clock on Thursday, August 20, 92% of Buffett’s more than $ 240 billion in invested assets was concentrated in just three sectors.
Berkshire Hathaway CEO Warren Buffett. Image Source: The Motley Fool.
Information technology: 49.33%
The craziest thing about this figure is not that information technology made just 0.43% of Buffett’s invested assets exactly 10 years ago and today is almost half of Berkshire’s portfolio. After all, it’s that all of that 49.33% stake is tied up in a single stock: Call (NASDAQ: AAPL).
In an interview on CNBCs Squawk Box in February, Omaha’s Oracle announced that “I do not think of Apple as a share. I think of it as ours. [Berkshire Hathaway’s] third company, “behind insurance and railways.
Interestingly, it was not Apple’s technology ties that initially attracted Buffett to begin building a stake in the company in 2016. Instead, it was Apple’s incredible market power that attracted him. One only has to look at the lines that wreck around Apple stores when the company releases a new iPhone to understand what kind of market power the company has.
Buffett has also been a big fan of Apple’s CEO Tim Cook, who is in the process of transforming his business from product-oriented to service-focused. For several quarters, we have seen services and portables grow at a double-digit rate on an annual basis. Services are a special segment with higher margins that should lead to less revenue growth for Apple over time.
In addition, the tech kingpin has done a good job of returning capital to shareholders, which Omaha Oracle appreciates. Apple has borrowed at historically low rates to finance aggressive share purchases, and is currently paying one of the largest nominal dividends in the U.S., north of $ 14 billion a year.
Image Source: Getty Images.
Financial: 29.05%
Perhaps the biggest surprise here is that Buffett’s favorite sector, financially, now represents “only” 29% of Berkshire Hathaway’s portfolio. The finances of 32.02% at the end of June marked a low nine-year, while the current 29.05% represents the smallest allocation of the sector since the bottom of the market in the first quarter of 2009.
Why the Perceptive Financial Sector Exodus? I believe there should be two answers.
To begin with, it is not that Buffett suddenly does not like bank shares and insurers, so much so that they have greatly underperformed the broader market since the March 2020 lows. Top holding Apple has doubled from its bottom of March while money-center bank Wells Fargo (NYSE: WFC) is down year-to-date by 56%, and has declined below its March 2020 bottom.
Remember, finances are highly cyclical companies that typically rely on stable economic growth to drive loan activity and higher interest income. During recessions, the Federal Reserve’s foolish monetary policy pushed down lending rates, hurting interest income for people like Wells Fargo and their peers.
The second factor that explains the decline in the financial sector allocation is that Buffett and his team seem to be consolidating their holdings in the sector. Bank of America (NYSE: BAC) has been a particularly popular addition to Omaha’s Oracle in recent weeks. Bank of America is probably the most interest-sensitive of all bank shares, and should therefore be among the first to profit when lending rates start to rise again. BofA has also done a solid job of controlling its uninteresting spending by focusing on mobile banking solutions and closing some of its physical branches.
Meanwhile, Wells Fargo is slowly cutting into Berkshire Hathaway’s portfolio. In addition to unfavorable growth prospects in the long term, the company is struggling to move on after a false account scandal that came to a head in 2016-2017.
Image Source: Kraft Heinz.
Consumer tickets: 13.56%
Finally, consumer stocks for staples (that is, companies that supply essential products such as packaged foods and beverages) have shrunk to less than 14% of Berkshire Hathaway’s investable assets. This marks at least a low two-decade, and is well below the 45.5% allocation given to consumer boots 10 years ago.
Why not love steps for consumers? One explanation is perhaps the relatively low interest rate environment where we have now been in privilege for more than a decade. Consumer buttons are mostly mature, slowly growing companies that profit when securities are in the advantage. However, access to low-cost loans has allowed growth stocks to outperform moderate companies and value stocks. As a result, most consumer staples have been in place for years. As Apple grew in value as a percentage of Berkshire Hathaway’s portfolio, the allocation given to consumer buttons shrank.
Another consideration is that Buffett still feels the pinnacle of one of his worst investments in recent decades: Kraft Heinz (NASDAQ: KHC). Although the coronavirus 2019 pandemic (COVID-19) has rekindled interest in some of Kraft Heinz’s packaged foods, it is not to be ignored that the company recorded more than $ 15 billion in goodwill in February 2019 on its Kraft and Oscar Mayer brands, as that it is financially limited by nearly $ 29 billion in total debt.
Kraft Heinz was considered a business model that could not be disrupted, but that did not prove to be the case. As a result, Buffett’s appetite for consumer shareholders seems to be waning.
