These 2 sectors represent 71% of Warren Buffett’s portfolio: are they resisting the recession? | Smart Change: Personal Finances

Warren Buffett is a master investor, with the wealth and track record to prove it. He has been successfully investing on his own terms for decades, often with heavy concentrations in individual sectors and stocks.

Buffet openly labeled diversification as a technique that only less skilled investors need. The portfolio to Berkshire Hathaway, the company that Buffett runs, reflects this belief. Specifically, two sectors account for 71% of Berkshire’s holdings: Technology and finance.

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Diversification is a risk management strategy. The goal is to prevent all of your assets from moving together, which would create extreme portfolio volatility. You may not mind upside volatility, but no one likes downside volatility.

With the possibility of a US recession looming, is Buffett making a bet on these two sectors? Let’s take a closer look.

Buffett’s holdings in finance

Berkshire owns 14 financial stocks. As you can see in the table below, the top four of these financial companies represent 23% of the overall portfolio.

Company name and symbol

Percentage of portfolio

Rank in the portfolio (in terms of value)

Bank of America (NYSE: BAC)

11.27%

2

American Express (NYSE:AXP)

7.67%

3

Moody’s (NYSE: MCO)

2.25%

8

American bank (NYSE:USB)

1.82%

9

Data source: repository 1Q22 13F.

The wider financial sector generally enjoys relatively stable demand in all types of economic climates. Some areas, such as bookkeeping and tax preparation services, can even get a boost in times of recession.

Buffett’s exposure, however, is to banks – which have their own behaviors in declining economies. Banks can do well during mild downturns, when credit card interest rates rise and borrowing levels increase. But banks will struggle as defaults rise.

Interestingly, Buffett opened smaller positions in two banks in the first quarter — Citigroup (NYSE:C) and Allied Financial (NYSE: ALLY), which has a consumer banking division. Buffett is not one to move in and out of a stock or sector based on short-term market conditions. So, unfortunately, you cannot interpret increased banking concentration as a prediction of a milder (bank-friendly) downturn.

It’s more appropriate to assume that Buffett is happy with the longer-term prospects for these stocks. Even if a deep recession materializes, Buffett sees these banks weathering the storm.

Buffett’s tech holdings

The chart below shows Berkshire’s technology stocks, all five.

Company name and symbol

Percentage of portfolio

Rank in the portfolio (in terms of value)

Apple (NASDAQ:AAPL)

42.11%

1

Activision (NASDAQ: ATVI)

1.39%

ten

resume (NYSE: HPQ)

1.14%

11

Snowflake (NYSE: SNOW)

0.38%

25

Nu Holdings (NYSE: NU)

0.22%

29

Data source: repository 1Q22 13F.

The technology sector, like financial services, is unlikely to show a uniform response to the recession. Mature technology companies like Apple, Microsoftand Alphabet obviously have advantages over their smaller counterparts. These benefits include diversified revenue streams, large-scale brand recognition, and access to capital. These factors, along with a continued business push toward digitalization, helped these tech stocks weather the brief 2020 recession.

A recession this year, however, could play out differently. Investors are already nervous about tech valuations, which have dragged down stock prices this year. This negative investor sentiment could create more extreme reactions to weaker-than-expected forecasts or earnings.

Smaller tech stocks are more risky during a recession. Their less stable trading performance exacerbates the challenges of a jittery investment climate and rising interest rates.

Buffett owns a few small tech stocks, but that exposure pales in comparison to his Apple holdings. And with Apple, Buffett shows no concern. When Apple’s stock price fell in the first quarter, it increased Berkshire’s position by nearly 3.8 million shares.

Buffett also bought more Activision shares in the first quarter on news that Microsoft will buy the video game maker.

Buffett held stable positions in HP, Snowflake and Nu Holdings in the first quarter. Snowflake is a data warehousing company with a positive outlook for this fiscal year. Nu Holdings is a digital bank platform with approximately 60 million customers in South America.

Diversification and recession investing

The finance and technology sectors both have complicated histories with the recession. Yet Buffett’s choices in these areas are strategic. He has proven his ability to identify sustainable businesses, which he says offers better protection than diversification.

Even so, most investors benefit from greater diversification than Buffett. It is too difficult to accurately predict how certain sectors or stocks will react to ever-changing circumstances. Diversification protects you from mistakes, which can keep you in the game to win another day.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Ally is an advertising partner of The Ascent, a Motley Fool Company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Catherine Broc holds positions at Microsoft. The Motley Fool holds and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Apple, Berkshire Hathaway (B shares), HP, Microsoft, Moody’s and Snowflake Inc. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway ( B) shares and short March 2023 Calls for $130 on Apple. The Motley Fool has a disclosure policy.

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