Warren Buffett is one of the smartest investors around and has been for decades. As CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Buffett offers tons of investment advice and commentary in his annual letters to shareholders and at the conglomerate's annual shareholders meeting in Omaha, Nebraska.

Buffett's advice tends to be straightforward, but one topic that he can sound contradictory on is diversification. He's a staunch advocate of most investors sticking with S&P 500 index funds. He has even directed the executor of his estate to invest 90% of the money he leaves to his wife in an S&P 500 index fund after he passes. Such funds offer a diverse portfolio of stocks representing numerous industries.

And yet, Berkshire Hathaway's $312 billion investment portfolio is heavily concentrated in just a few stocks. Its top three holdings account for nearly 53% of the portfolio's value. On that point, Buffett makes a great analogy: "If you have LeBron James on your team, don't take him out of the game just to make room for someone else. ... It's crazy to put money into your 20th choice rather than your first choice."

Here are Buffett's top three choices right now, which combined account for the majority of Berkshire's investment portfolio.

1. Apple (29%)

Apple (NASDAQ: AAPL) has long been one of Berkshire Hathaway's largest equity holdings. Not only did Buffett spend an estimated $37 billion acquiring a stake in Apple from 2016 through 2018, but the stock has appreciated greatly since then.

At one point, it accounted for more than 50% of Berkshire's equity portfolio. Buffett called Apple "a better business than any we own," referencing Berkshire's portfolio of wholly owned companies like Geico and See's Candies. Recently, Buffett trimmed the position over the last three quarters, including a massive sale of nearly half of Berkshire's remaining stake in the second quarter. Still, Apple remains Berkshire's largest equity holding by far, and Buffett expects it to remain the largest position in its portfolio for the foreseeable future.

There's a lot to like about Apple. The company's ecosystem of hardware and services provides stable revenue as customers generally remain extremely loyal to the brand. Its services business provides a nice area of high-margin revenue growth for the business while the stalwart iPhone ensures that cash flow remains high. Significant share buybacks give an additional boost to its earnings per share every year. And when a new growth catalyst comes along, like the potential for a surge in iPhone upgrade rates due to the pending debut of new AI features, it provides a significant bump in earnings.

At its current price, the stock trades for around 30 times forward earnings. That's a premium to the S&P 500, but the stock is arguably worth it as significant cash on its balance sheet and robust share buybacks support strong returns for shareholders.

2. American Express (12%)

Buffett, through Berkshire, acquired a substantial stake in American Express (NYSE: AXP) in the mid-1990s, and he hasn't done much with the position since. It's a true buy-and-hold story.

Buffett pointed to the value of his investment in Amex during his 2022 letter to shareholders. The annual dividends paid on Berkshire's original $1.3 billion total investment in the stock climbed from $41 million in 1995 to $302 million that year. More importantly, the stock has grown in step with Berkshire Hathaway, and even faster over the past year and a half. In his 2023 letter to shareholders, he said Berkshire's share of Amex's earnings from the prior year exceeded the $1.3 billion originally invested two decades ago.

On the subject of American Express, he said, the lesson is clear: "When you find a truly wonderful business, stick with it. Patience pays." Indeed, Berkshire's Amex position is now worth about $37.5 billion.

What separates American Express from other credit card networks is that it issues the cards as well as manages the payment network. That allows it to retain greater control and capture a greater share of the economics of card transactions. That business has treated it extremely well as more and more transactions move from cash to digital payment tools like credit cards. Amex is quickly expanding its network, particularly internationally, where it lags behind its largest rivals, enhancing the network effect of the business.

More recently, Amex has turned to lending as a growth opportunity. Historically, it required charge card balances to be paid in full every month, but now, some of its cards permit users to carry a balance. Its net interest income grew 20% year over year in the second quarter, accounting for 23% of net revenue.

It has also driven revenue growth by increasing its card fees, while still maintaining its popularity with high-value, high-income consumers. That provides additional protection for Amex against economic slowdowns relative to other card issuers and payment networks.

Shares currently trade near an all-time high, but with a forward P/E ratio of 19, the stock still presents good value.

3. Bank of America (11.6%)

Another financial stock sitting near the top of Buffett's roster of all-stars, Bank of America (NYSE: BAC) was a more recent addition to the portfolio. Berkshire Hathaway first acquired preferred shares in the bank in 2011, plowing $5 billion into it -- a highly public vote of confidence in the bank at a time when investor sentiment toward it had soured in the wake of the mortgage crisis. Along with the 5% dividend paid by the preferred shares, Buffett received warrants to buy 700 million shares of BofA's common stock anytime over the next decade for $7.14 each.

In 2017, Buffett exercised those warrants because Bank of America raised its quarterly dividend to $0.12 per share, meaning that Berkshire could get more in dividends from the common stock than the preferred shares. So he sold the preferred stock to cover his common stock purchase. Buffett went on to add to the position over the next few years.

Recently though, Berkshire trimmed about 12% of its stake in BofA. The reason was likely the same as the one behind the Apple stock sale. Berkshire currently benefits from favorable corporate tax policies that are set to expire at the end of 2025. It's sitting on massive gains from its common stock shares of BofA, which currently trade around $38.50.

Bank of America struggled during 2022 and 2023 as the Federal Reserve hiked benchmark U.S. interest rates to curb surging inflation. It held a relatively high amount of long-duration bonds on its balance sheet that lost value on paper as those interest rates climbed. That led to a decline in BofA's net interest income as it had to pay higher interest rates on customers' deposits while collecting lower interest rates from pre-2022 bonds. But the worst appears to be behind BofA as interest rate cuts appear to be on the horizon. Management believes that its net interest income reached the bottom of its trough in the second quarter.

Shares currently trade for 1.5 times tangible book value, which is a fair price to pay even as earnings remain under pressure from interest rates. While Buffett sold some Bank of America shares recently, a 12% cut in Berkshire's stake shouldn't be viewed as signaling that anything is wrong with the business.

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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. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Warren Buffett Has 52.6% of Berkshire Hathaway's $312 Billion Portfolio Invested in 3 Phenomenal Stocks was originally published by The Motley Fool