Warren Buffett, the CEO of Berkshire Hathaway, is celebrated as one of the most astute investors for decades. He frequently shares investment insights in his annual letters to shareholders and at Berkshire’s annual meeting in Omaha, Nebraska. Although Buffett typically advocates for straightforward investment strategies, his views on diversification can seem contradictory. He recommends that most investors invest in S&P 500 index funds, even instructing his estate executor to allocate 90% of his wife’s inheritance to such a fund. These funds offer a diversified portfolio across various industries.
However, Berkshire Hathaway’s $312 billion investment portfolio is concentrated, with its top three holdings making up nearly 53% of its total value. Buffett uses a sports analogy to explain this approach: “If you have LeBron James on your team, don’t take him out of the game just to make room for someone else.” He implies that focusing on top choices rather than spreading investments too thin is a wise strategy. Here are Buffett’s top three investment choices:
1. Apple (29%)
Apple has been a major component of Berkshire’s equity holdings for years. Buffett invested approximately $37 billion in Apple shares between 2016 and 2018, benefiting from significant appreciation. Although he has recently trimmed the position, Apple remains the largest holding in Berkshire’s portfolio. Apple’s ecosystem of hardware and services ensures stable revenue and customer loyalty, with the high-margin services business contributing to growth. Share buybacks further enhance its earnings per share, and new growth catalysts like AI features could boost profits. Despite a high price-to-earnings ratio, Apple’s substantial cash reserves and buybacks support robust shareholder returns.
2. American Express (12%)
Buffett acquired a significant stake in American Express in the mid-1990s, and he has largely held onto it since then. He highlights American Express as a prime example of a “wonderful business” worth holding onto. The company issues cards and manages the payment network, allowing it to capture a larger share of transaction economics. As digital payments rise, American Express benefits. Its recent expansion into lending and increased card fees have driven revenue growth. Despite trading near an all-time high, its forward P/E ratio of 19 suggests it still offers value.
3. Bank of America (11.6%)
Bank of America is a more recent addition to Berkshire’s portfolio. Buffett initially acquired preferred shares in 2011 during a challenging period for the bank, receiving warrants to purchase common stock. In 2017, he exercised these warrants, and despite trimming the position by 12%, he maintains confidence in the bank’s long-term prospects. Bank of America has faced challenges due to interest rate hikes, affecting its net interest income, but expectations of future rate cuts could improve its situation. The shares currently trade at 1.5 times tangible book value, a reasonable price even amid pressure from interest rates.
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Summary
Warren Buffett, renowned for his investment wisdom, champions a selective diversification strategy. While advocating S&P 500 index funds for most investors, Berkshire Hathaway’s portfolio is concentrated in a few top choices: Apple, American Express, and Bank of America. Despite recent position trims, these investments reflect Buffett’s belief in holding strong businesses. Apple benefits from a loyal customer base and growth opportunities, American Express capitalizes on digital payment trends, and Bank of America is poised for recovery as interest rate challenges ease. Investors should weigh Berkshire Hathaway’s portfolio against other promising stocks identified by The Motley Fool.
