Diversifying the holdings in your investment portfolio can be a valuable tool for most investors. The strategy prevents you from putting too many eggs in potentially dangerous baskets, while still leaving the door open for strong returns when big winners flourish. But diversification isn't for everyone.
Berkshire Hathaway CEO Warren Buffett is among those who believe it's unwise to spread your funds across too many bets -- so long as you have a very good grasp on what you're doing. The Oracle of Omaha has described diversification as "protection against ignorance," and his incredible track record makes it clear that he's anything but ignorant.
Buffett's hyper-concentrated approach to portfolio composition won't be a good fit for most investors, but it's undoubtedly served him well through the years. With that in mind, read on for a look at two stock holdings that account for 57.1% of Berkshire Hathaway's current stock holdings.
The rare situation where it's best not to emulate Warren Buffett
Parkev Tatevosian:Apple(NASDAQ: AAPL) is one of the most innovative companies in the world, and that undoubtedly is one of the reasons it's attractive to Buffett. Additionally, Apple has built one of the stickiest ecosystems ever. Roughly 48.6% of Berkshire Hathaway's portfolio is invested in Apple stock as of this writing. But not for the reason you might suspect.
Apple is an excellent company that warrants interest from investors. The company has increased revenue from $183 billion in 2014 to $383 billion in 2023. Moreover, Apple's brand recognition and strong relationship with customers has allowed it to charge premium prices for its portfolio of products, including the headliner iPhone. Of course, with relatively higher prices comes higher profits, and Apple has shown success on that front. Operating income increased from $53 billion to $114 billion in the same years mentioned above.
But it's still surprising to me that Berkshire Hathaway has roughly half of its portfolio in one stock. Diversifying your holdings across several stocks is best for most investors.
The fact that a professional like Buffett operates a concentrated portfolio surprises me. This is one of those cases for investors where I would say, "Don't try this at home." A skilled, experienced manager like Buffett might pull it off, but it's not advisable for investors to ignore the benefits of diversification.
Bank of America is one of Buffett's big winners
Keith Noonan: Bank of America (NYSE: BAC) has been one of Berkshire Hathaway's biggest winners over the lpst decade, but Buffett has had a somewhat complicated relationship with the financial services company. Berkshire started investing in BofA in 2007 -- just as a big financial crisis was kicking off.
By the fourth quarter of 2010, Berkshire had sold all of its Bank of America stock. The financial services giant had continued to struggle due to lingering impacts of the Great Recession and the subprime mortgage debacle, and it faced additional risk factors related to concerns about the overall macroeconomic outlook and whether the U.S. debt ceiling would be raised.
But Buffett had a change of heart on BofA stock. With the banking giant potentially needing an injection of capital to stave off risks of liquidity shortfalls, the Oracle of Omaha approached the company's CEO with a deal to strengthen the bank's financial footing. Berkshire ultimately bought $5 billion worth of Bank of America's preferred stock in 2011 and secured the opportunity to purchase 700 million additional shares of common stock through exercisable warrants at a price of $7.14 per share.
Roughly six years later, Berkshire to exercise those warrants. At the time, Bank of America was trading north of $24 per share, which means that Berkshire almost immediately secured a massive profit.
Today, Bank of America stock is trading in the range of $29.50 per share, and Berkshire has seen paper gains more than quadrupling the price it paid to exercise the stock warrants. Even better, BofA has delivered big dividend growth over the last decade as its financial footing has improved, so the total return on Buffett's biggest banking play is actually even stronger.
At 8.5% of Berkshire Hathaway's portfolio, BofA stands as the investment conglomerate's second-largest stock holding. Berkshire also holds a stake in the bank totaling 13%, and it wouldn't be surprising to see the Oracle of Omaha add to the position in the coming years.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian, CFA has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.