Warren Buffett’s Top Holdings Define 2023 Outlook (2023)

Perhaps the world’s most successful investor, Warren Buffett is known for his superb stock picking and business management skills, which helped him turn Berkshire Hathaway (BRK.A)(BRK.B) from a struggling textile mill into a thriving conglomerate with a massive investment portfolio that beat the S&P 500 in 39 out of the past 58 years.

Beating the market in 39 out of 58 years may not seem like a lot to some people, but you have to remember that those gains add up over time. Moreover, Buffett is a value investor who learned from the legendary Benjamin Graham himself, so he focuses not just on maximizing upside potential but also on minimizing downside risk.

Since Buffett took over Berkshire in 1965, the S&P 500 has cumulatively gained about 24,708%. It may be hard to believe, but over that same time frame, Berkshire’s stock has gained a cumulative 3,787,464%, which means Berkshire Hathaway has returned about 153 times more than the market benchmark.

Buffett’s own net worth has swelled to an estimated $115 billion, making him the fifth-richest man in the world according to Forbes, despite making significant donations to charities such as the Bill & Melinda Gates Foundation and the Susan Thompson Buffett Foundation (named after Buffett’s first wife). Forbes estimates that Buffett has donated about $48 billion to charity throughout his lifetime, which means he might just be the biggest philanthropist of all time, at least from a monetary standpoint.

Many investors are wondering what Buffett’s investing strategy is for 2023. There’s a lot to learn from this investing guru’s insights, and while he never provides anything like a strategic outlook for the year, he does give us a wealth of advice through his annual shareholder letters. Contemporary letters, interviews and commentaries are typically focused on recent changes, though, so only looking at these may mean overlooking the enduring giants of Buffett’s portfolio that still make up his top holdings today.

In this article, we will take a look at the top holdings in Buffett’s portfolio as of his most recent 13F filing for the fourth quarter of 2022, and the guru’s reasons for buying and holding these stocks.

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Apple (AAPL)

Apple is Buffett’s top holding by a long shot, making up a 38.9% slice of Berkshire Hathaway’s stock portfolio. Berkshire first initiated the position in the first quarter of 2016.

Despite saying several times in the past that technology stocks fall outside of his circle of competence, Buffett felt like he understood Apple because at its heart, it is a consumer goods company. For years now, its competitive moat has been more about brand value and customer satisfaction rather than trying to develop technology at the cost of profitability and shareholder value.

There is a possibility that Buffett’s portfolio managers, Ted Weschler and Todd Combs, may have been behind the original decision for Berkshire to buy Apple. The duo is known for having more knowledge of the technology sector than Buffett. However, it’s hard to imagine Buffett didn’t have a direct hand in the matter shortly thereafter, as Berkshire kept buying shares until its position was worth more than $5 billion by the end of 2016 and $47 billion by the end of 2018.

“I don’t think of Apple as a stock. I think of it as our third business,” Buffett said in a February 2022 interview on CNBC. “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.”

The Apple investment is a perfect demonstration of Buffett’s focus on buying good companies at fair prices and staying within your circle of competence. When Berkshire first bought the stock, the company was already profitable and had a price-earnings ratio of 11 in addition to a moat built around the brand value of its consumer goods.

Bank of America (BAC)

Buffett’s second-largest holding, Bank of America, accounts for 11.2% of Berkshire’s portfolio. Buffett’s firm gained a new common stock position in the bank in the third quarter of 2017 after exercising the warrants from a 2011 preferred stock investment worth $5 billion.

Unlike the tentative beginning with Apple, Buffett was big on Bank of America from the get-go due to an often-overlooked part of his investment strategy: namely, investing in companies with good management. In 2017, he praised the bank’s then-CEO Brian Moynihan for doing a “sensational job” of turning things around after the Financial Crisis.

The Buffett-Bank of America partnership did hit a snag early on. In 2011, Buffett wanted to invest in Bank of America but couldn’t get through to Moynihan on the phone because he was calling from a public call center. However, Berkshire’s chief financial officer managed to get through to him via one of Bank of America’s investment bankers. Buffett was then able to invest $5 billion in the bank’s preferred shares, and in 2017, his positive outlook on the bank led him to exercise the warrants rather than waiting for them to expire in 2021. By that time, the investment was worth about $17 billion.

In addition to investing in companies with good management, the Bank of America case also shows Buffett’s philosophy of “being greedy when others are fearful.” It may be tempting to avoid stocks when the economy is doing badly, but that is often when even the best companies go on sale, increasing their long-term upside potential.

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Chevron (CVX)

Chevron is a much more recent addition to the Berkshire stock portfolio. Buffett’s firm first began to buy shares of the oil giant in the third quarter of 2020, building up the stake through the third quarter of 2022 before making a tiny reduction in the fourth quarter of 2022. The stock now has a 9.8% weight among Berkshire’s common stock holdings.

This investment came as a surprise to some because Buffett usually maintains that his favorite holding period is forever. It’s typically not a good idea to hold cyclical stocks long term because they struggle when the economy struggles. Profiting big from cyclical stocks usually relies on being able to accurately time the market.

However, Buffett’s investing strategy has always been adaptable to different situations and he typically doesn’t shy away from investments in cyclicals just because they won’t go up forever. Chevron also isn’t your typical cyclical stock. Its financial footing is strong, as demonstrated by the Piotroski F-Score of 9 out of 9, and it offers a dividend yield of 3.9%. When Berkshire first began building the position, the dividend yield was in the 5% to 7% range.

“I think Chevron has benefited society in all kinds of ways and I think it continues to do so, and I think we’re going to need a lot of hydrocarbons for a long time and we’ll be very glad we’ve got them,” commented Buffett at Berkshire’s 2022 annual shareholder meeting.

Coca-Cola (KO)

One of the longest-held stocks in Berkshire’s portfolio, Buffett first began buying Coca-Cola back in 1988. Nowadays, it takes up 8.5% of the Berkshire stock portfolio at 400,000,000 shares. The shares that Berkshire acquired at its initial purchase price now sport a dividend yield of an incredible 54%.

The beloved carbonated beverage brand has stood the test of time, becoming one of the foremost examples of what it means to have a brand-based competitive moat and dominate the consumer’s “share of mind” (i.e. the consumer’s attention). Buffett explained his strategy of looking for companies with a good moat at Berkshire’s 1995 annual shareholder meeting:

“What we're trying to find is a business that, for one reason or another–it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all–has this moat around it."

Regardless of the source of the moat, its existence serves to protect the company from competition. If a company has superior technology, a more attractive brand or the cheapest products, for example, it becomes difficult for a competitor to get a foothold.

Its moat has helped Coca-Cola build economies of scale, which is another characteristic Buffett likes to see. As it has grown bigger, Coca-Cola has increasingly benefited from a more efficient distribution network, free advertising via word of mouth, long-standing retail relationships and more.

American Express (AXP)

American Express is another long-standing giant of Buffett’s portfolio. Berkshire began buying shares in 1995 and has racked up a stake of 151,610,700 shares over the years, taking up 7.5% of the portfolio space. The dividend yield alone is 23% of the initial purchase price.

The credit card business model is a simple one that has become incredibly profitable over time, especially as it became clear that just a few names would come to dominate the industry due to the fact that economies of scale and recognizable brands are essential to the business model’s functionality.

American Express does have some key differences from its main competitors, MasterCard (MA) and Visa (V), which are worth taking note of. These three may be known as the top American credit card brands, but American Express is more of a financial company as it combines an electronic payment network with a card issuing service, while MasterCard and Visa are just electronic payment networks. Speaking purely in terms of credit cards, American Express’ cards are known for having better benefits but higher fees and a smaller network versus its main competitors.

Being a card issuer does expose American Express to the risk of defaults in the case of a recession, which is why it typically trades at lower valuation multiples compared to its peers. However, Buffett understands the financial services sector more than he understands the technology sector, which is likely why he prefers American Express over Visa and MasterCard.

Takeaway

In conclusion, after analyzing Berkshire’s top holdings, some of which he has held since before the turn of the century, we can clearly see the investing strategies that have brought Buffett success in the past. These holdings and strategies also define the guru’s outlook for 2023, as they continue to make up the majority of Berkshire’s common stock portfolio.

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