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The ‘Real’ Secret Behind Buffett’s Investing Success

by | Nov 22, 2022 | Market Outlook

Warren Buffett ranks among the greatest investors in history. The Benjamin Graham acolyte has used time, patience and savvy capital management to build a net worth north of $100 billion.

“The stock market is a device which transfers money from the impatient to the patient,” Buffett has famously said.

He’s focused his portfolio around market-leading companies that maintain strong cash flows. In addition, he built conglomerate Berkshire Hathaway Inc. (NYSE: BRK-A) into an industry titan that dominates the railway, insurance and consumer products sectors.

But there’s one more factor that goes unnoticed about the companies Buffett buys… Today, I’ll reveal one of his best practices that goes under the radar.

Buffett’s Top Positions

Buffett made headlines this month after purchasing a $4.1-billion position in Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) in the third quarter.

Taiwan Semiconductor is a producer of advanced computer chips for companies like Apple Inc. (Nasdaq: AAPL), another of Buffett’s holdings.

With the purchase, Buffett has largely dismissed the ongoing tensions between the United States and China over the sovereignty of Taiwan. Buffett’s total position in TSM is roughly 60 million shares.

In the third quarter, Buffett also bought a significant amount of shares in producers of oil and gas and homebuilding products. He added to positions of Occidental Petroleum Corp. (NYSE: OXY), Celanese Corp. (NYSE: CE) and Chevron Corp. (NYSE: CVX), and created a new stake in Louisiana-Pacific Corp. (NYSE: LPX). 

Here’s a breakdown of Buffett’s top 10 positions…

Ticker Company Value ($1,000)
AAPL Apple Inc. $123,661,679
BAC Bank of America Corp. $30,505,039
CVX Chevron Corp. $23,757,173
KO Coca-Cola Co. $22,407,999
AXP American Express Co. $20,453,800
OXY Occidental Petroleum Corp. $11,942,909
KHC The Kraft Heinz Co. $10,859,921
MCO Moody’s Corp. $5,997,470
ATVI Activision Blizzard Inc. $4,470,946
TSM Taiwan Semiconductor Manufacturing $4,117,774

 

Apple is clearly his largest position by a wide margin — more than 40% of Buffett’s total portfolio. But look at the rest of the positions… Do you notice anything that the stocks here have in common?

What if I also note that Buffett owns large stakes in The Kroger Co. (NYSE: KR), Visa Inc. (NYSE: V), Mastercard Inc. (NYSE: MA) and United Parcel Service Inc. (NYSE: UPS)

What do so many of Buffett’s holdings have in common?

The answer is “market share.”

Buffett Loves Monopolies

One of the more interesting themes of Buffett’s portfolio is monopoly or duopoly power. He taps into companies that not only have strong cash flow, but they also dominate their industries in terms of power.

Have a look at this chart below. It breaks down the industries that Buffett taps, the stocks he owns and the marketshare controlled by the largest players.

As you can see, Buffett owns stakes in Mastercard, Visa and American Express Co. (NYSE: AXP). It just so happens that those three companies dominate 99% of the credit card and debit market in the United States.

A lot of people have this image of Buffett as a sweet old man. The reality is he is a ruthless capitalist who benefits from the market dominance of his investments. He invested in Moody’s Corp. (NYSE: MCO) — a rating agency with little competition outside of two other companies. Combined, they have 95% of the market.

It’s hard to argue against the commercial banking world — where consolidation continues — and the Federal Reserve ensures the health of these banks over the long term.

His five investments in JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), Citigroup Inc. (NYSE: C) and U.S. Bancorp (NYSE: USB) represent 44% of the market. Some companies fall within the Berkshire Hathaway product portfolio — names like BNSF Railway and Duracell — that dominate their respective markets.

Don’t be afraid to follow Buffett’s lead. This strategy works for a reason.

We’ll talk more about how to trade these stocks in the weeks ahead.

Enjoy your day,

Garrett

WRITTEN BY<br>Garrett Baldwin

WRITTEN BY
Garrett Baldwin

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