Buffett’s success is primarily attributed to his ability to identify companies with sustainable competitive advantages, as well as his persistence in holding positions for long periods of time.
But that only tells part of the story. Buffett’s outperformance is also a direct reflection of his reluctance to embrace the idea of traditional investment diversification. The Oracle of Omaha doesn’t believe in diversification if you know what you’re doing. By sticking with companies in industries and sectors he knows very well, Buffett has amassed a long history of outperforming.
At the closing bell on Thursday, August 20, 92% of Buffett’s more than $ 240 billion invested assets were concentrated in just three sectors.
Information Technology: 49.33%
The craziest thing about that number isn’t that information technology only made up 0.43% of Buffett’s invested assets exactly 10 years ago and makes up almost half of Berkshire’s portfolio today. ‘hui. Rather, the entirety of this 49.33% stake is linked to a single share: Apple (NASDAQ: AAPL).
In an interview on CNBC Squawk Box in February, the Oracle of Omaha said, “I don’t see Apple as a stock. I consider him our [Berkshire Hathaway’s] third case, “behind insurance and railways.
Interestingly, it wasn’t Apple’s tech ties that initially prompted Buffett to start taking a stake in the company in 2016. Instead, it was Apple’s incredible branding power that made it happen. got hooked. One need only look at the lines that surround Apple stores each time the company launches a new iPhone to understand the branding power of the company.
Buffett has also been a big fan of Apple CEO Tim Cook, who is in the process of transforming his business into a product-driven one. For several quarters, we have seen services and wearable devices grow at double-digit rates year over year. Services is a particularly high-margin segment that is expected to lead to lower flat-rate revenue for Apple over time.
Plus, the tech kingpin has done a good job of returning capital to shareholders, which the Oracle of Omaha appreciates. Apple has borrowed at historically low rates to fund aggressive stock buybacks and is currently paying one of the largest nominal dividends in the United States, north of $ 14 billion a year.
Perhaps the biggest surprise here is that Buffett’s preferred industry, finance, now accounts for “only” 29% of Berkshire Hathaway’s portfolio. The 32.02% of financials recorded at the end of June marked a nine-year low, while the current 29.05% is the sector’s smallest allocation since the market bottomed in the first quarter of 2009.
Why the perceived exodus from the financial sector? I believe there are two answers.
For starters, it’s not that Buffett suddenly doesn’t like bank stocks and insurers, just as they have vastly underperformed the market as a whole since the March 2020 lows. doubled from its March low, while the central monetary bank Wells Fargo (NYSE: WFC) is down 56% year-to-date and has fallen below its March 2020 low.
Remember that financial services are highly cyclical companies that generally depend on steady economic growth to stimulate credit activity and increase interest income. During recessions, the Federal Reserve’s accommodative monetary policy drives lending rates down, hurting interest income for Wells Fargo and its peers.
The second factor behind the decline in the allocation to the financial sector is that Buffett and his team appear to be consolidating their holdings in the sector. Bank of America (NYSE: BAC) has been a particularly popular addition for the Oracle of Omaha in recent weeks. Bank of America is arguably the most interest rate sensitive of all bank stocks and should therefore be among the first to benefit when lending rates start to rise again. BofA has also done a solid job of controlling its non-interest spending by focusing on mobile banking solutions and closing some of its physical branches.
During this time, Wells Fargo was gradually reduced in the Berkshire Hathaway portfolio. In addition to unfavorable short-term growth prospects, the company struggled to overcome a fake account scandal that occurred in 2016-2017.
Consumer Staples: 13.56%
Finally, consumer staples stocks (that is, companies that supply essentials like packaged food and beverages) fell to less than 14% of Berkshire Hathaway’s investable assets. This marks at least a low of at least two decades and is well below the 45.5% allocation given to consumer staples 10 years ago.
Why not love basic consumer goods? One explanation could be the relatively low interest rate environment we have been aware of for over a decade. Consumer Staples are generally mature, slow-growing companies that benefit when value stocks are in favor. However, access to cheap loans has allowed growth stocks to significantly outperform mature companies and value stocks. As a result, most stocks of basic consumer goods have been in place for years. As Apple’s value increased as a percentage of Berkshire Hathaway’s portfolio, the allocation to consumer staples declined.
Another consideration is that Buffett is still feeling the sting of one of his worst investments in decades: Kraft Heinz (NASDAQ: KHC). While the 2019 Coronavirus Disease (COVID-19) pandemic has rekindled interest in some of Kraft Heinz’s packaged foods, that doesn’t deny the company has taken over $ 15 billion in goodwill. in February 2019 on its Kraft and Oscar Mayer brands, or that it was financially constrained by nearly $ 29 billion in total debt.
Kraft Heinz was seen as a business model that couldn’t be disrupted, but that didn’t turn out to be the case. As a result, Buffett’s appetite for consumer staples appears to have waned.