34% of Warren Buffett’s $318 Billion Portfolio Is Invested in These 8 “Forever” Stocks

In 1965, Warren Buffett became CEO of Berkshire Hathaway (BRK.A -2.74%) (BRK.B -2.85%) and began a period of notable outperformance relative to Wall Street’s benchmark stock indices. Over nearly six decades, he has overseen a cumulative return on his company’s Class A shares (BRK.A) exceeding 5,700,000%!

Money managers running around Wall Street tend to get a lot of attention. But when you offer a gain of over 5,700,000%, investors will pay attention to your every word and can mirror your buying and selling activity.

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

What’s interesting about the Oracle of Omaha’s success is that he’s mostly been an open book about the traits he looks for in investments. For example, Buffett regularly looks for time-tested businesses with identifiable competitive advantages and strong management teams that can be held for years, if not decades. He’s also a big fan of focusing his company’s invested assets on his best ideas.

However, not all of the 45 stocks held in Berkshire Hathaway’s roughly $318 billion investment portfolio have the same outlook. While “years” tend to be the typical holding period for a stock in Berkshire’s portfolio, Warren Buffett’s latest annual letter to shareholders highlighted eight stocks that were called “indefinite” holdings.

As you can imagine, top investment ideas are expected to stick around for a long time. These eight forever holdings currently account for 34% ($106.5 billion) of Berkshire Hathaway’s invested assets.

No. 1: American Express, $39.2 billion (12.3% of invested assets)

Following the sale of approximately 150 million shares of Bank of America since mid-July by Buffett and his team, credit services Goliath American Express (AXP 0.04%) it reached No. 2 by market value in Berkshire’s portfolio. “AmEx,” as the company is known, has been an ongoing holding company of Buffett’s company since 1991.

Financials are Oracle of Omaha’s favorite sector, largely because they are cyclical. Buffett and his best investment assistants, Todd Combs and Ted Weschler, are fully aware that recessions are a normal and inevitable part of the business cycle. Instead of throwing darts and trying to guess when these recessions will happen, they rely on a numbers game that undoubtedly works in their favor.

In the 79 years since the end of World War II, there have been a dozen recessions in the US, and all but three have resolved in less than 12 months. By comparison, almost every growth period lasted several years, with two expansions reaching the 10-year mark. Betting that the US economy and consumer/business spending would grow over long periods was a brilliant move.

American Express also benefits from both sides of the transaction counter. In the US, it is the third largest payment processor by credit card network purchase volume, which allows it to collect fees from merchants. However, it also generates fees and interest income from its line of credit cards.

Don’t overlook AmEx’s ability to attract high net worth individuals either. Cardholders with high incomes are less likely to adjust their spending habits or default on their bill during minor economic disruptions.

Image source: Coca-Cola.

No. 2: Coca-Cola, $29 billion (9.1% of invested assets)

The only forever holding that has been in Berkshire Hathaway’s portfolio even longer than AmEx is the beverage giant Coca cola (K.O -1.92%)which has been running continuously since 1988.

Berkshire’s cost basis in Coca-Cola is just $3.2475 per share, which equates to a nearly 60% return on cost, based on Coke’s annual payout of $1.94 per share. In other words, Buffett sees his initial investment in Coca-Cola more than double from dividend income alone every two years.

One of the reasons Coca-Cola is such a great company is that it’s a consumer staples stock. It provides a good (drinks) that consumers need regardless of how good or bad their country’s economy is. This leads to very predictable year-over-year operating cash flow.

As far as consumer goods companies go, you’d probably be hard-pressed to find a business with better branding than Coca-Cola. Kantar’s annual Brand Footprint report has labeled Coca-Cola as the brand of choice for consumers on retail shelves for the 12th consecutive year. This is a testament to its long history as a public company, as well as its ability to connect with mature and young audiences through a combination of brand ambassadors and digital media.

In addition, Coca-Cola’s geographic diversity is virtually unmatched. In addition to having more than two dozen brands that generate at least $1 billion in annual sales, the company has operations in every country except Cuba, North Korea and Russia. Coca-Cola is able to generate significant cash flow in developed countries, all while moving the organic growth needle in emerging markets.

No. 3: Occidental Petroleum, $14.5 billion (4.6% of invested assets)

While it has been known for some time that AmEx and Coca-Cola are undetermined holdings for Warren Buffett, the addition of the integrated oil and gas stock Occidental Petroleum (OXY -1.63%) in its annual letter to shareholders released in February, was something that raised eyebrows.

The Oracle of Omaha and his team began buying shares of Occidental in the first quarter of 2022. Since then, Berkshire’s stake in the company has grown to nearly 255.3 million shares, or about 27.3% of Occidental’s outstanding shares . Buffett has received permission from US regulators to buy up to a 50% stake in Occidental, but has no interest in acquiring the company.

Since Warren Buffett is a big believer in never betting against America, one of the most logical bets he can make is on rising demand for energy commodities like oil.

One of the most interesting catalysts for Occidental is global crude oil supply constraints. About three years of significant cuts in capital spending by the world’s energy majors during the COVID-19 pandemic has left the industry reeling. When the supply of a good in demand is reduced, it tends to support its price.

Few integrated oil and gas operators generate a greater percentage of their revenue from drilling than Occidental. If the spot price of crude oil remains high or rises further, Occidental should enjoy a huge benefit to its operating cash flow. Just be warned that a reciprocal event (i.e. a drop in the spot price of crude oil) would negatively impact cash flow more than other integrated energy companies.

No. 4 – No. 8: The five Japanese trading houses, $23.7 billion (combined) from Mitsubishi (2.3% of invested assets), Itochu (2%), Mitsui (1.7%), Marubeni (0.8%) and Sumitomo (0.7%)

The other group of stocks that Buffett talked about as forever holdings in his latest annual letter to shareholders is Japan’s Big Five trading houses: Mitsubishi (MTSU.Y -0.77%) (MSBHF 0.10%), Itochu (ITOCIA 1.75%) (ITOCF 9.18%), Mitsui (MITSY 0.97%) (MITSF 5.12%), Marubeni (MARUY 0.91%) (MERCHANDISE 1.40%)and Sumitomo (SUM.Y 0.92%) (SUM.F 4.51%).

You might wonder why some of Buffett’s companies are so highly valued for less than 1% of Berkshire’s invested assets. The simple reason is that Buffett and his team agreed not to buy more than a 9.9% stake in these five Japanese trading houses. These five holdings currently range from 7.5% (for Itochu) to 8.6% (for Mitsubishi) of outstanding shares.

One of the likely reasons why the Oracle of Omaha favors these five businesses as indefinite holdings is that they are deeply rooted in Japan’s economy. Mitsubishi, Itochu, Mitsui, Marubeni and Sumitomo are involved in oil and gas operations, food production, mining, renewable energy, chemicals and so on. The list of these companies would be a book in itself. If an investor believes that the Japanese economy will grow in the long term, these trading houses make unusual purchases.

Valuation is another key attraction for Japan’s five trading houses. The stock market is historically expensive right now and has been for much of the past decade. Japanese trading houses have low price-to-earnings ratios and generally robust capital return programs.

In addition, the management teams of these five businesses receive reasonably low compensation packages. This means the focus is on shareholder returns, which Warren Buffett values ​​enormously.