The legendary value investor – Berkshire Hathaway chairman Warren Buffett has an unmatched track record of market-beating returns for more than half a century. The 90 year’s old billionaire, who held $279 billion in stocks says, “The stock market is a device for transferring money from the impatient to the patient.”
He adds further that investing is very simple.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with a 160 IQ always beats the guy with a 130 IQ. Rationality is essential. You need a stable personality”
He used a basic value investing strategy to generate a 20.0% average annual return since Berkshire’s inception in 1965, almost double compared to the S&P 500 returns of 10.2%.
Buffett, who is worth nearly $100 billion according to Forbes, Portfolio Insider & Bloomberg, has been using a concentrated portfolio strategy instead of diversification.
The legendary investor held 84.29% of the stake in three sectors and his top ten holdings weighted around 88% of the Berkshire Hathaway Inc. (NYSE: BRK-B) portfolio. These three sectors include information technology, finance, and consumer staples.
What’s more, Buffett’s concentrated portfolio strategy worked even in the most volatile and unpredictable year. His investment holding earned $26.7 billion in net unrealized gains from its existing stock positions during the pandemic year while realized gains came in at $4.5 billion.
“In aggregate, we expect our share of the huge pile of earnings retained by Berkshire’s non-controlled businesses (what others would label our equity portfolio) to eventually deliver us an equal or greater amount of capital gains. Over our 56-year tenure, that expectation has been met,” Buffett said in an investor letter.
Let’s start digging into stocks from three sectors Warren Buffett like the most:
Information Technology: 44.25%
Apple Inc (NASDAQ: AAPL) represents 44.25% of Berkshire’s portfolio, valued at around $117 billion.
While Warren Buffett is a value investor and he strictly follows his stock selection criteria, he has now moved his portfolio focus towards growth stocks, thanks to his fund managers Todd Combs and Ted Weschler.
Nevertheless, Apple’s strong business model played a big role in enhancing Buffett’s confidence.
“I don’t think of Apple as a stock. I think of it as our third business,” Buffett said. “It’s probably the best business I know in the world. And that is a bigger commitment than we have in any business except insurance and the railroad,” he added.
Fortunately, the legendary investor’s stock-picking strategy worked in the case of the iPhone maker. Shares of the world’s largest tech giant rallied 380% since Berkshire first initiated a position in Apple in 2016. Apple’s dividend-paying strategy is further adding to shareholders’ returns. Berkshire collected more than $770 million in dividend income from Apple.
The cloud-based data platform Snowflake Inc. (NYSE: SNOW) represented only a small portion of Buffett’s portfolio at the end of the latest quarter. Snowflake is ranked at 21st spot in Buffett’s portfolio and weighted around 0.66%, according to the latest 13F filings.
Financial Sector: 27%
The financial sector is one of Buffett’s most favorite areas of investment. Although the legendary investors sold out his Goldman Sachs, JP Morgan, and a few other financial stocks positions during the pandemic year, he still holds a big position in several banking and financial services stocks.
The financial sector accounted for 27% of Berkshire Hathaway’s stock portfolio at the end of 2020, down from 43% in the prior year.
Four out of his top ten positions belong to the financial sector. Bank of America is Buffett’s largest financial stock holding followed by American Express Company (NYSE: AXP), Moody’s Corporation (NYSE: MCO), and U.S. Bancorp (NYSE: USB). In total, Berkshire Hathaway held 14 financial-sector stocks positions at the end of 2020. Buffett likes to invest in well-established financial companies due to two main reasons: share price appreciation and dividends.
Consumer Staples: 12.73%
Warren Buffett’s Berkshire has long been holding positions in consumer staples companies amid their steady growth potential. Further bolstering the investment thesis in consumer staples companies is their predictable nature of cash generation potential.
Dividends play a big role in enhancing shareholder’s overall returns. Warren Buffett expects to receive $3.8 billion in dividends this year from its portfolio holdings. Berkshire’s third-largest stock holding Coca-Cola Co (NYSE: KO) has lifted dividends in the past 58 straight years.
Buffett also held a big stake in Kraft Heinz Co (NASDAQ: KHC) since 2015. Despite the latest rally, the shares of the consumer staples company plunged sharply in the last five years, pulling Berkshire’s initial $13.8 billion investment in Kraft Heinz to around $11.2 billion at present. Nevertheless, the company’s dividend payments helped to offset the impact of share price loss. The company currently offers a dividend yield of just over 4%.