Warren Buffett has an incredible track record of exceeding that S&P 500.
At the beginning of each Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) In the annual report, he shares Berkshire Hathaway’s annual returns compared to the S&P 500 (including dividends) for each year since 1965, the year he took control of the company. The results are nothing short of remarkable. Berkshire Hathaway’s average annual return since Buffett took over is 19.8%, compared to 10.2% for the S&P 500.
Buffett managed to achieve these results in all sorts of markets and economic conditions. His exclusive focus on finding great companies that trade at a fair price has served him and his investors well. These stocks generally offer greater downside protection and the potential to outperform the overall market.
So when Buffett identifies a company that he believes should outperform market averages in the future, investors take notice. Buffett shared his expectations for such a company in his recent letter to shareholders.
According to Buffett, one stock should perform better than average
Buffett manages a stock portfolio worth $376 billion with the help of fellow Berkshire investment managers Ted Weschler and Todd Combs.
Buffett has praised the operations and management teams for some of his largest holdings, including Apple, Bank of America, American ExpressAnd Coke. These four positions together make up more than two-thirds of the entire portfolio. And Buffett is happy to hold these stocks indefinitely.
Buffett and his team recently acquired significant stakes in Occidental Petroleum and Liberty Media SiriusXM inventory tracking, Liberty SiriusXM. The former has become a significant holding in the portfolio, especially when considering Berkshire’s Occidental preferred shares. Buffett also praised Occidental CEO Vicki Hollub in his recent letter to shareholders.
But none of these are the stocks that Buffett believes should perform better than average. Or maybe it’s all of them.
That’s because Buffett believes Berkshire Hathaway itself is the company to own. In addition to having a portfolio of great equity investments, the company owns an insurance company, railroads, utilities and energy companies, and dozens of other businesses.
“With our current business mix, Berkshire should “Perform a little better than the average American company,” Buffett wrote to shareholders.should operate with significantly lower risk of permanent capital loss.”
Buffett doesn’t exactly promise much luck with an investment in Berkshire Hathaway. In fact, he believes that the times when the company would outperform the S&P 500 are far off, given its massive size ($862 billion as of this writing). “Anything beyond ‘slightly better’ … is wishful thinking,” he wrote.
It’s also worth repeating his comments from Berkshire Hathaway’s 2020 shareholder meeting. “I happen to think Berkshire is as healthy as anyone else.” singles Investing can be about earning reasonable returns over time, but I don’t want to bet my life on whether we beat the S&P 500 in the next decade.” Just because something should If we beat the market with sound fundamental analysis, that doesn’t mean it will be that way.
Buffett follows his words with actions
Not only is Buffett the CEO of Berkshire Hathaway, about 99% of his wealth is tied to the company. He says his family members are also very interested in Berkshire’s success. In his most recent letter to shareholders, he talks about his sister Bertie and points out that she and her three daughters have invested a large portion of their savings in Berkshire stocks.
In other words, Buffett cares deeply about Berkshire Hathaway and its shareholders. And as he notes, “Care doesn’t guarantee results, but attention does.” And Buffett’s attention is historically worth a lot.
In addition, Buffett invested a large portion of Berkshire’s additional money into purchasing shares of Berkshire Hathaway. The board revised its capital return program in mid-2018, authorizing Buffett to buy back shares of the stock if he and Vice Chairman Charlie Munger believed the price of the shares fell below their intrinsic value. Since Munger’s death, Buffett is now the sole factor determining the stock’s value.
Since the change, Buffett has repurchased $74 billion worth of Berkshire Hathaway shares. “Such buybacks,” Buffett emphasizes to shareholders, “are aimed at increasing your holdings.” every asset that Berkshire owns.”
Despite Buffett’s assessment that Berkshire holds a number of companies that are likely to outperform the average company, the stock trades at a forward price-to-earnings ratio of just 17.7x. In comparison, the S&P 500 trades at a forward P/E ratio of 20.8x.
Additionally, Berkshire has a huge cash pile of around $167.6 billion while Buffett continues to buy back shares on a quarterly basis. Both factors should give the stock a valuation premium. Instead, it seems like a great bargain, especially considering the companies and stock portfolios investors are getting for the price.
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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 holds positions at Apple. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Here is the 1 stock that Warren Buffett believes should outperform the S&P 500 without so much downside. The stock was originally published by The Motley Fool