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For decades, no investment portfolio has been more closely watched by investors than Berkshire Hathaway's (NYSE:BRKA)(NYSE:BRKB). Now-retired CEO Warren Buffett always had a knack for spotting amazing deals hiding in plain sight, leading to a greater-than-6,000,000% outperformance of the S&P 500 (SNPINDEX:^GSPC) since the mid-1960s.
But investors might not realize that a "secret" Buffett portfolio exists within Berkshire Hathaway. In the June-ended quarter, this $863 million portfolio sent shares of artificial intelligence (AI) superstars Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) and Broadcom (NASDAQ:AVGO) packing. Meanwhile, this under-the-radar fund has built up a significant position in two S&P 500 index funds: the State Street SPDR S&P 500 ETF Trust (NYSEMKT:SPY) and the Vanguard S&P 500 ETF (NYSEMKT:VOO).
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In 1998, Buffett's Berkshire acquired reinsurance company General Re for about $22 billion in an all-stock deal. While the reinsurance operations were the crown jewel of this buyout, General Re also owned a specialty investment firm, New England Asset Management (NEAM). When the deal closed in December 1998, NEAM became a subsidiary of Berkshire Hathaway.
Although NEAM's portfolio wasn't directly overseen by the Oracle of Omaha, the assets NEAM's investment team purchased were, ultimately, owned by Berkshire, making it Warren Buffett's "secret" portfolio.
During the second quarter, NEAM dumped 97% of its Broadcom shares (formerly a 6,605-share position) and 48% of its Alphabet Class A shares (GOOGL).
While profit-taking likely explains the sales of these multiyear holdings, it may not be the only catalyst.
The AI infrastructure build-out has lifted the stock market to its second-priciest valuation in 156 years, according to the Shiller Price-to-Earnings Ratio. History tells us that this AI-driven move isn't sustainable. Though Broadcom and Alphabet aren't egregiously pricey, an AI bubble forming and subsequently bursting would almost certainly pull the rug out from beneath both stocks.
At the other end of the spectrum, perhaps it's only fitting that more than $149 million of Buffett's secret portfolio (about 17.3%) is invested in the State Street SPDR S&P 500 Trust ($76.1 million) and the Vanguard S&P 500 ETF ($73.2 million).
Over more than half a century at the helm, the Oracle of Omaha never gave individual stock recommendations. But the one investment recommendation he has made is that most retail investors consider buying a low-cost S&P 500 index fund, which includes the two listed here.
According to Crestmont Research, the S&P 500 has a perfect track record of making investors richer, assuming one variable is met: investors hold an S&P 500-tracking fund for 20 years.
Crestmont calculated the rolling 20-year total returns, including dividends, of the benchmark S&P 500 since 1900 (which included tracking the performance of its components from 1900-1923 in other indexes, prior to the S&P's inception). Analysts found that all 107 rolling 20-year periods since 1900 generated a positive average annual total return.
Warren Buffett never bet against America or its stock market because he recognized that the U.S. economy and its greatest businesses collectively rose in value over time. Investing in the State Street SPDR S&P 500 ETF Trust and the Vanguard S&P 500 ETF allows investors to take advantage of this natural expansion over the long run.
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Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Broadcom, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Warren Buffett's $863 Million "Secret" Portfolio Dumped Alphabet and Broadcom, but Has Over 17% of Invested Assets in This Proven Moneymaking Strategy was originally published by The Motley Fool
