Arguably no money manager garners more attention on Wall Street than Berkshire Hathaway (BRK.A) (BRK.B -0.82%) CEO Warren Buffett. During his nearly 60 years as CEO, he’s overseen an aggregate return in his company’s Class A shares (BRK.A) of more than 5,500,000%!

Lengthy books have been written detailing the Oracle of Omaha’s investing philosophy. Generally, Buffett is attracted to time-tested, profitable businesses, with strong management teams, well-defined competitive advantages, and established capital-return programs.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

But the factor that doesn’t get nearly enough credit for Berkshire Hathaway’s continued long-term outperformance is Buffett’s decision to concentrate his company’s investment portfolio. Despite holding stakes in 43 stocks and two exchange-traded funds (ETFs), approximately 62% ($192.7 billion) of Berkshire’s $313 billion portfolio can be traced to just four magnificent holdings.

Apple: $92.2 billion (29.4% of invested assets)

For years, tech goliath Apple (AAPL 0.36%) has sat atop the pedestal as the largest holding in the portfolio Warren Buffett oversees at Berkshire — but there have been significant changes since October 2023. Specifically, Buffett and his team have sold more than 515 million shares of Apple and reduced their company’s position to an even 400 million shares.

In May, during Berkshire’s annual shareholder meeting, Buffett suggested that corporate tax rates were likely to climb, and used this as something of a pivot to explain his company’s recent selling of Apple stock. He believes shareholders will, in hindsight, value Berkshire Hathaway locking in sizable gains at a lower tax rate.

Despite being a big-time seller of Apple shares, Buffett still thinks highly of his company’s top holding. Apple is a valuable, well-known brand that has a loyal customer base. Further, CEO Tim Cook is spearheading a multiyear plan that’s refocused his company on subscription services. A platform-based operating model should lead to higher margins over time, as well as smooth out the revenue peaks and valleys that typically accompany iPhone replacement cycles.

This is also a good time to mention that Apple sports the largest capital-return program among public companies. Since initiating a share repurchase program in 2013, Apple has bought back $700.6 billion worth of its common stock and reduced its outstanding share count by more than 42%. This has had a meaningfully positive impact on its earnings per share (EPS).

However, Apple is also historically pricey at 35 times trailing-12-month EPS, and its physical product sales have stagnated, including iPhone. Since Buffett is an ardent value investor, this may have played a role in paring down his company’s stake by north of 515 million shares over nine months.

American Express: $40.9 billion (13.1% of invested assets)

Over the last few months, credit-services provider American Express (AXP -0.97%), which is commonly known as “AmEx,” has leaped into the No. 2 spot in Warren Buffett’s portfolio at Berkshire Hathaway. AmEx shares have been continuously held by Berkshire since 1991.

The reason the Oracle of Omaha favors financial stocks like AmEx is because they’re cyclical. Although recessions are bad news for the U.S. economy and credit-services providers, they’re short-lived. Only three recessions since the end of World War II endured for at least 12 months, and none surpassed 18 months. Meanwhile, most economic expansions last for multiple years, which allows cyclical stocks to thrive.

The non-linearity of the economic cycle is particularly important for American Express given its ability to play both sides of the transaction aisle.

On one hand, it’s the No. 3 payment processor by credit card network purchase volume in the U.S., the largest global market for consumption. This helps it generate predictable fees from merchants. But AmEx is also a lender via its credit cards, which means it’s collecting fees and/or interest income from its personal and business cardholders.

The final catalyst has been American Express’s ability to court high earners. Cardholders with higher incomes are less likely to alter their purchasing habits during periods of economic turbulence, which should help AmEx weather recessions better than most lenders.

Image source: Getty Images.

Bank of America: $32.7 billion (10.4% of invested assets)

Money-center goliath Bank of America (BAC -1.78%) had, until recently, been Berkshire Hathaway’s No. 2 holding by market value. However, Buffett and his team have jettisoned around 266 million shares of BofA since July 17, which allowed AmEx to leapfrog it.

It’s possible that this recent selling activity is tax-related, similar to what Warren Buffett alluded to with Apple during Berkshire Hathaway’s annual shareholder meeting. But with the Oracle of Omaha and his investment aides being net sellers of stocks for seven straight quarters (Oct. 1, 2022 through June 30, 2024), it might also signal Buffett’s displeasure with high stock valuations.

One factor Bank of America undeniably has working in its favor, much like AmEx, is time. Periods of economic expansion last considerably longer than contractions, which allows BofA to prudently grow its loan portfolio over time.

Bank of America was a prime beneficiary of the Federal Reserve’s most-aggressive rate-hiking cycle in four decades, as well. No money-center bank is more sensitive to changes in interest rates than BofA. The resulting 525-basis-point uptick in the federal funds rate, at its peak, added billions of dollars in net interest income to Bank of America’s bottom line each quarter.

Warren Buffett is probably also a fan of Bank of America’s capital-return program. When the U.S. economy is firing on all cylinders and BofA passes the Fed’s annual stress test, it’s not unusual for its board to approve a $20 billion or greater capital-return plan, inclusive of share buybacks and dividends.

Coca-Cola: $26.9 billion (8.6% of invested assets)

The fourth magnificent stock that, in combination with Apple, American Express, and Bank of America, accounts for approximately 62% of Berkshire Hathaway’s invested assets, is beverage behemoth Coca-Cola (KO -0.56%), which happens to be Buffett’s longest continuous holding (since 1988).

Although Buffett has historically favored financial stocks above all else, he’s still a big fan of consumer staples. No matter how well or poorly the U.S. and global economy are performing, Coca-Cola is able to deliver highly predictable operating results, thanks to beverages being a basic necessity.

In terms of geographic reach, few businesses offer the revenue diversity that Coca-Cola brings to the table. With the exception of North Korea, Cuba, and Russia, the latter of which has to do with its invasion of Ukraine, Coca-Cola has operations in every other country. This leads to strong cash flow in developed markets, as well as needle-moving organic growth potential in emerging market regions.

Coca-Cola has strong branding on its side, too. In each of the last 12 years, Kantar’s “Brand Footprint” report notes that the Coca-Cola’s brand was chosen by consumers off retail shelves more than any other brand. Having a well-recognized logo and over a century of history to lean on certainly helps.

Not to sound like a broken record, but Warren Buffett is undoubtedly attracted to Coca-Cola’s dividend. This consumer staples juggernaut has increased its base annual payout for 62 consecutive years and is dishing out $1.94 per share on an annual basis. Based on Berkshire’s cost basis in Coca-Cola stock of $3.2475 per share, it means Buffett’s company is doubling its initial investment from the dividend income alone every 21 months!