While it is good to read articles and books about the legendary investor, a study of the top 10 Warren Buffett stock holdings might provide the most instructive insights into his investing philosophy and strategy.
The Oracle of Ohama, as he is also known, has become a legend in the stock investing world that many investors look up to. As the sixth richest man on the planet (at the time of writing), Buffett built his incredible wealth from investing, so it is understandable why so many stock investors look to emulate his success.
However, just copying Warren Buffett’s portfolio does not guarantee his success (or any success at all).
A better (and wiser) approach is to try and first understand the philosophy and reasoning behind his choices of stocks, then use that knowledge as parameters to better invest within the boundaries of your own capital, investment goals, and the current economic environment.
In this article, we’ll consider:
Warren Buffett first learned his investing strategy from Benjamin Graham, his former teacher at Columbia Business School, and the father of value investing.
Value investing, as an investment strategy, focuses on identifying companies with good fundamentals that are currently undervalued by the stock market. To understand value investing, it’s essential to distinguish between the intrinsic value of a stock and its market price.
The former is a measure of what the stock is actually worth based on its fundamentals while the latter is what it currently sells for on the stock market, based on the dynamics of demand and supply.
A stock is undervalued when its intrinsic value is higher than its market price. It’s overvalued when its intrinsic value is lower than its market price. So, why do value investors choose undervalued stocks?
They believe that once the fundamentals of a company are truly reflected, the market price will grow towards the intrinsic value. Therefore, the market price will be higher going forward as other market participants discover the intrinsic worth of the stock.
In support of value investing, Warren Buffett once wrote, “Whether we’re talking about stocks or socks, I like buying quality merchandise when it is marked down.”
[For more Warren Buffet quotes, read, “Top 20 Warren Buffett Quotes To Inspire Your Investment Goals“]
While Warren Buffett believed in buying good stocks that are undervalued, his motivation is atypical of other value investors. As said above, value investors often buy undervalued stocks with the expectation that the market price will grow to reflect that intrinsic value. For Buffett, what matters most is the company’s long-term ability to generate consistent and increasing earnings.
Once a company can continue to grow its earnings and book value (equity) over the long term, its market price will keep rising. Consequently, Warren Buffett prefers to hold such stocks for the long term, instead of trying to predict when (or if) intrinsic value and market price will converge. In his words, “our favourite holding period is forever.”
Because of this concern for long-term earnings capacity, his fundamental analysis is often more expanded than other value investors. As he said, “it’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” Some of the things he considers are:
Having looked briefly at his investment strategy, let’s consider how this plays out to influence the choices of the top 10 holdings in Buffett’s investment portfolio (measured by value of stake).
Here, by “Buffett’s investment portfolio,” we are referring to the holdings of his multinational conglomerate holding company — Berkshire Hathaway (BRK). Warren first purchased shares of Berkshire Hathaway in 1962 before becoming the majority shareholder in 1964. At this time, it was a failing textile company. Buffett would later diversify the activities of the company by purchasing some insurance companies.
The rest is history. Since 1965, Berkshire Hathaway has grown its shareholders’ equity annually by 19%. Within the same period, the S&P 500 grew annually by 9.7%. In 1980, the Class A shares of BRK traded at $275 per share; they now trade at $437,890 per share at the time of writing, making it the highest valued share price in the world.
This tremendous growth is a result of Warren Buffett’s particular investment philosophy. Now, let’s look at his top 10 holdings as a way of understanding just how that philosophy plays out.
(The figures below are as at June, 2021 and are sourced via The Motley Fool.)
The largest of Warren Buffett’s stock holdings is Apple. Though Buffett was initially skeptical about tech stocks, he decided to eventually enter into the tech trade on the 31st of March, 2016 when he purchased 9,811,747 shares in Apple. As at June 2021, he had 907,559,761 shares, which are worth about $130.6 billion.
Founded in 1976, Apple operates in the consumer electronic industry under the technology sector. It manufactures and sells smartphones (iPhones), personal computers (MacBooks), tablets (iPads) and a range of other products, including AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch. They also offer a wide range of services that includes AppleCare, Apple App Store, Apple Arcade, Apple Music, Apple News+, Apple Fitness+, Apple TV+, Apple Card, and Apple Pay.
The iPhone constituted 50% of the total net sales of Apple in 2020. This means that the iPhone remains Apple’s most important product.
According to data from Counterpoint Research, Apple has consistently maintained more than a 10% share of the global smartphone market since 2018. It also maintained its second or third position in the global smartphone market, until it lost out in Q2, 2021 when it became fourth.
The consistency in market share shows that Apple has an economic moat. Despite the high price of its iPhones, it still has a committed customer base who prefer it to other products because of its security, high-end features, innovativeness, and sleek design, among other attributes. Beyond the iPhone, Apple as a company has built an economic moat around its innovative products, strong integrated supply chain, premium pricing, and brand strength, according to Biz Fluent.
One way to see Apple’s economic moat is to look at its ROE. While American companies averaged a 12% ROE between 1990 and 2020, Apple averaged a 38.6% ROE between 2010 and 2020, according to Forbes. Similarly, Apple’s profit margin has also experienced impressive growth, increasing from 23.53% at the end of Q2, 2011 to 25% at the end of Q2, 2021.
Apple’s strong rise in ROE, growing profit margin, and ability to maintain its market share despite its higher price shows that this company has a competitive advantage. The presence of these many competitive advantages is the fundamental value that Warren Buffett looks for.
Warren purchased his first BAC shares on the 31st of December, 2007. By 31st of March, 2011, he no longer had any shares of Bank of America. However, on the 30th of September, 2017, he bought 679,000,000 shares of the company. By the end of Q2, 2021, he had 1,032,852,006 shares, which were valued at $44.7 billion.
Bank of America provides various banking and financing services across the globe. It has various segments that include the consumer banking segment, global wealth and investment management segment, global banking, and global markets segment. As of April 15, 2021, it has 66 million customers worldwide with 4,300 retail financial centers.
According to Bank Rate, Bank of America is currently the second biggest bank in the US, with $2.35 trillion in assets. Also, Bank of America leads over other US banks in the value of domestic deposit, with $1.747 billion in holdings as of 2020.
In banking, the more non-interest yielding deposits you have, the more net interest income you can earn. Leading over other banks in terms of domestic deposits is thus a major competitive advantage for Bank of America. According to the Competitive Advantage Analysis website, location convenience, digital products, customer service, and great concern for privacy and security are all other major competitive advantages of Bank of America (BAC).
Another good fundamental that Warren Buffett looks for is low debt-to-equity ratio, At BAC, the debt-to-equity ratio has reduced from 1.92 at the end of Q2, 2011 to 0.99 at the end of Q2, 2021.
However, it had a little rough patch leading from the 2008/2009 financial crisis that saw it record a negative ROE of -7.27% at the end of Q2,2011 and a negative profit margin of -14.75%. True to its fundamental soundness, BAC later grew its ROE to 5.51% at the end of Q2, 2016 and it is now 10.58% at the end of Q2, 2021. Similarly, it later grew its net profit margin to 15.50% at the end of Q2,2 016 and is now 31.53% at the end of Q2, 2021.
The essential point here is that good fundamentals don’t preclude rough patches. Even fundamentally sound companies can have periods of negative growth. However, some of them, like BAC, true to their underlying fundamentals, find a way to grow out of the rough patches due to their competitive advantages.
As at December 31, 2007, Warren Buffett had 151,610,700 AXP shares. He has maintained the same number of shares since then (except for a brief period between September, 2010 and March, 2011 where he reduced his shares to 48,580,511). His 151,610,700 shares were worth $27 billion at the end of Q2, 2021.
American Express offers a broad range of services: payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services under its three segments — Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. They also offer merchant acquisition and processing, servicing and settlement, point-of-sale marketing, and information products and services for merchants; and fraud prevention services, as well as the design and operation of customer loyalty programs.
American Express has continued to maintain its market share as the third largest credit card company in the world.
Unlike most credit card companies, American Express uses a spend-centric model, which means its revenue depends on the amount customers spend when they use the card rather than the volume of transactions. Another competitive advantage of American Express is that it issues its own cards, which allows it to charge a discount fee from merchants.
Furthermore, they incentivise higher spending through rewards and offer value-added services like merchant financing. Finally, they use their closed-loop network to personalise offers to customers and connect merchants with customers more likely to spend more money.
The ROE of American Express has increased from 27.19% at the end of Q2, 2011 to 29.19% at the end of Q2, 2021. Net profit margin has increased from 14.76% to 17.77% within the same period. However, the debt-to-equity ratio has fallen from 3.37 to 1.46 during the same period.
Companies with rising ROE and profit margin, consistent market share, and falling debt-to-equity ratio are the exact characteristics of shares that Buffett loves to hold a lot of.
Warren Buffett first bought shares of Coca-Cola as far back as 1988. By December 31, 2007, he had 200,000,000 shares in the company. He doubled that amount in 2012 and has maintained it till date. Those 400,000,000 shares were worth $21.6 billion at the end of Q2 ,2021.
Coca-Cola is a US beverage company that sells non-alcoholic beverages all over the world. Their products include: sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks. They also sell beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores.
As of June 18, 2021, Warren Buffett has made a 1,550% return on his Coca-cola investment.
One simple reason is because Coca-Cola has been the market leader in the carbonated soft drink industry since 2004, according to Investopedia. The company derives its competitive advantage from its strong brand image, extensive marketing efforts, broad product portfolio, and global reach.
After its ROE rose to 42.67% on December 31, 2010, it declined to 5.79% at the end of 2017. However, since then, ROE has picked up and it was 36.64% at the end of Q2, 2021. The same trajectory occurred with net profit margin — from a high of 33.56% at the end of 2010, it fell to 3.45% at the end of 2017; it is now 22.13% at the end of Q2, 2021.
Again, just like in the BAC situation, we see that companies with good fundamentals can have a rough patch, especially during and following a recession, where profit margin and ROE are down. However, true to their fundamentals and competitive advantage, they find a way back. This is why having a long-term perspective is so important.
Warren Buffett purchased 325,634,818 shares of Kraft Heinz in 2015 and has maintained his stake in the company ever since. His shares were valued at $12 billion at the end of Q2, 2021.
Kraft Heinz is a US company that sells food and beverages across the world. Their products include: condiments and sauces, cheese and dairy, meals, meats and seafood, frozen and chilled foods, packaged drinking pouches, appetisers, nuts and salted snacks, refreshment beverages, coffee, infant and nutrition products, and other grocery products, as well as desserts, dressings, toppings, and baking.
An iconic brand, high barriers to entry, low cyclicality, and stable cash flow are some of the competitive advantages of Kraft Heinz. It’s currently ranked fifth in the global consumer packaged goods industry.
On December 31, 2012, Kraft Heinz had a ROE of 59.37% which later fell to -20.89% at the end of Q2, 2019. Their ROE has since picked up and it is now 4.33% as of the end of Q2, 2021. The company’s net profit margin experienced the same dynamics, starting at 10.96%, falling to -43.27%, and is now at 8.20% as of the end of Q2, 2021. However, the debt-to-equity ratio has been falling from 2.79 at the end of 2012 to 0.47 at the end of Q2, 2021.
Kraft Heinz has shown the same dynamics as BAC and Coca-Cola above to confirm the point that companies with good fundamentals are not invincible. They can and will experience some rough patches, but over time, they find a way back. And some of them like Kraft Heinz can even find their way back while reducing their debt profile (falling debt-to-equity ratio). This means that they don’t need to take on more debt to boost their revenue and profit going forward.
At the end of 2007, Warren Buffett had 48,000,000 shares in Moody’s. He continued to reduce his holdings until he had 24,669,778 at the end of 2013. He has continued to hold those same number of shares, valued at $9.2 billion at the end of Q2, 2021.
Moody’s Corporation operates as an integrated risk assessment firm worldwide through two main segments: Moody’s Investors Service and Moody’s Analytics.
The Moody’s Investors Service segment publishes credit ratings and provides assessment services on various debt obligations, programs and facilities, and entities that issue such obligations. The Moody’s Analytics segment develops a range of products and services that support the risk management activities of institutional participants in financial markets; and offers subscription based research, data, and analytical products comprising credit ratings, credit research, quantitative credit scores, etc.
Both Moody’s and Standard & Poor (better known as S&P) have long dominated the credit rating industry. As at December, 2020, Moody’s had 33.12% of the European market and as of December, 2019, it had 34.2% of the American market.
The competitive advantage of Moody’s is its brand. Moody’s and S&P remain the benchmark rating agencies in the US and Europe, constituting a huge barrier to entry. As Buffett himself has said, “Standard & Poor’s and Moody’s are totally the benchmarks for Berkshire. I would love to shop around. Believe me, I have no pricing, no negotiating power with either Standard & Poor’s or Moody’s. The market demands that I be rated by Standard & Poor’s and Moody’s.”
However, since 1998, Moody’s has differentiated itself from S&P as the more conservative rating agency. A 2010 Journal of Money, Credit, and Banking report showed that some analysts tend to put more weight on Moody’s ratings as the more conservative rating agency.
At the end of Q2, 2011, Moody’s ROE was negative: -295.69%. Ten years later, the ROE was 103.97%. Net profit margin has increased in the same period from 27.34% to 36.11%. In 2011, debt-to-equity was negative at -73.98%. At the end of Q2, 2021, debt-to-equity ratio was 2.67.
The move from an ROE of -295.69% in 2011, after the recession, to a ROE of 103.97% 10 years later shows that companies with good fundamentals have a way of surviving difficult times due to their competitive advantage.
In MCO’s case, the recession led to a huge rise in liabilities, which resulted in negative shareholders’ equity (and negative equity will lead to negative ROE and debt-to-equity ratio). Despite this crisis, it was still able to maintain and grow its net profit margin. Ten years later, the company now has positive equity, ROE is growing wildly, and debt-to-equity is just 2.67.
At the end of 2007, Warren Buffett had 67,581,926 shares in US Bancorp. Today, he has 147,315,527 shares valued at $8.9 billion at the end of Q2, 2021.
U.S. Bancorp, a financial services holding company, provides various financial services in the United States. It operates in Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support segments. The company offers depository services, including checking accounts, savings accounts, and time certificate contracts; lending services, such as traditional credit products; and credit card services, lease financing and import/export trade, asset-backed lending, agricultural finance, and other products, among other range of services.
USB is the biggest regional bank in the United States and the fifth biggest bank in the US (international and regional). One of the competitive advantages of USB is its low capital reserve requirement when compared to global banks like JP Morgan and Bank of America. This allows it to circulate more money through loans and earn higher interest income. Low cost and high debt rating are other competitive advantages USB enjoys.
At the end of Q2, 2011, ROE was 12.78%. It has grown steadily and was 13.17% at the end of Q2, 2021. Net profit margin has also grown steadily within the same period, from 19.12% to 29.16%. On the other hand, the debt-to-equity ratio has declined from 0.99 to 0.66.
US Bancorp has been able to maintain a rising ROE and profit margin and a falling debt-to-equity ratio for the past 10 years, the very characteristics of a company with competitive advantage.
Warren Buffett first purchased 11,022,743 VZ shares in 2014. By 2019, he had sold off all his investments in VZ. However, in 2020, Warren purchased 146, 716,496 shares of VZ. His total stake is now up to 158,824,575, valued at $8.7 billion at the end of Q2, 2021.
Verizon Communications Inc. offers communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide.
Its consumer segment provides postpaid and prepaid service plans; internet access on notebook computers and tablets; wireless equipment, including smartphones and other handsets; and wireless-enabled internet devices, such as tablets, and other wireless-enabled connected devices, such as smartwatches. The company’s Business segment provides network connectivity products, including private networking, private cloud connectivity, virtual and software-defined networking, and internet access services; and internet protocol-based voice and video services, unified communications and collaboration tools, and customer contact center solutions.
As of December 31, 2020, Verizon had approximately 94 million wireless retail connections, 7 million broadband connections, and 4 million FiOS video connections.
Verizon is one of the top brands in the US wireless communications industry. They and AT&T are the US market’s two major players, which have continued to dominate the industry. Verizon’s strong cash flow generation, superior network, and customer loyalty are some of its main competitive advantages that have made it appealing enough to be picked up by Warren Buffett.
VZ’s ROE has increased from 7.23% at the end of Q2,2011 to 28.19% at the end of Q2, 2021. The net profit margin has also increased from 5.91% to 15.05% in the same period. The debt-to-equity ratio was 0.53 at the end of Q2, 2011, then it went as high as 10.13 at the end of Q1, 2015. However, this began to fall afterwards and it stood at 1.93 at the end of Q2, 2021.
The presence of competitive advantages can be seen in how VZ has more than tripled both profit margin and ROE within 10 years. Though it took on some debt that increased its debt-to-equity ratio in 2015, it has reduced its debt-to-equity ratio to 1.93 within 6 years.
Warren Buffett has 225,000,000 shares of China’s BYD Company, valued at $6.9 billion, as at December 31, 2020.
BYD Company Limited, together with its subsidiaries, primarily engages in the research, development, manufacture, and sale of automobiles and related products worldwide. It operates through three segments: Rechargeable Battery and Photovoltaic Products; Mobile Handset Components and Assembly Service; and Automobiles and Related Products. The company also offers internal combustion, hybrid, and battery-electric passenger vehicles; buses, coaches, and taxis; logistics, construction, and sanitation vehicles; and vehicles for warehousing, port, airport, and mining operations.
Located in Shenzhen, China, one of BYD’s competitive advantages is its low-cost R&D. BYD’s engineers are graduates of various universities in China. Its vertical integration strategy, focus on local customers, diversification, and innovative production methods are other sources of competitive advantage.
The net profit margin of BYD was 0.08% at the end of Q2, 2011, then it grew to 1.88% by the end of Q2, 2021. Debt-to-equity ratio is currently at 0.4948, and ROE is 6.95%.
With more than 2,250% growth in net profit margin within the past 10 years and a very low debt-to-equity ratio, it’s evident why Warren Buffett considers BYD a fundamentally sound company.
The last of the holdings in the top 10 of Warren Buffett’s portfolio is DaVita. Warren Buffett started with 2,684,500 shares of DaVita in 2011. His stake is currently 36,095,570, valued at $4.4 billion.
DaVita Inc. provides kidney dialysis services for patients suffering from chronic kidney failure or end stage renal disease (ESRD). The company operates kidney dialysis centers and provides related lab services in outpatient dialysis centers.
It also provides outpatient, hospital inpatient, and home-based hemodialysis services; owns clinical laboratories that provide routine laboratory tests for dialysis and other physician-prescribed laboratory tests for ESRD patients; and management and administrative services to outpatient dialysis centers. In addition, the company provides disease management services; vascular access services; clinical research programs; physician services; and comprehensive care services.
One of DaVita’s core competencies is its “community first, company second” approach. DaVita has successfully turned talent recruitment from its fundamental weakness to a fundamental strength. Also, DaVita has made some smart acquisitions in the past that have increased its competitiveness.
At the end of Q2, 2011, DaVita’s ROE was 18.03%. Then ROE peaked at 55.60% at the end of Q2, 2021. The net profit margin has increased from 6.08% at the end of Q2, 2011 to 7.47% at the end of Q2, 2021.
Rising profit margin and a ROE that has more than doubled within 10 years are good signs of a company with competitive advantage, the type of companies that Warren Buffett likes to own forever.
This brief overview of Warren Buffett’s stock holdings is a practical illustration of his investment strategy: buy companies with competitive advantage that can grow their earnings (as evidenced in their profit margins) and ROE in the future (while keeping a low debt profile) when they are undervalued by the market.
As said above, instead of just buying everything Warren Buffett holds, the important thing is to learn his strategy and put them into practice.
Now that you are a bit more familiar with his investment strategy, it’s time you start creating your own portfolio of companies.
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