Warren Buffett boasts an impressive history of beating the S&P 500.
In every Berkshire Hathaway annual report, he presents the annual returns of Berkshire Hathaway versus the S&P 500 (including dividends) dating back to 1965 when he assumed control. The figures are truly astounding: Berkshire Hathaway has delivered a compound annual return of 19.8%, compared to the S&P 500’s 10.2%.
Buffett achieved these results across various market conditions by focusing solely on identifying exceptional companies trading at reasonable prices. Such stocks typically offer better protection against downturns while also having the potential to outperform the broader market.
Therefore, when Buffett identifies a company he believes will surpass market averages, investors take notice. In his latest shareholder letter, he unveiled his expectations for one such company.
The one stock Buffett says should do better than average
Buffett’s Ultimate Bet: Why Berkshire Hathaway Might Outshine the Rest
Buffett oversees a colossal $376 billion equities portfolio with the support of Berkshire’s other investment managers, Ted Weschler and Todd Combs.
He has lauded the operational prowess and management teams behind some of his largest holdings, such as Apple, Bank of America, American Express, and Coca-Cola, which collectively comprise over two-thirds of the entire portfolio. Buffett intends to hold these stocks indefinitely.
Recent significant stakes in Occidental Petroleum and Liberty Media’s Sirius XM tracking stock, Liberty SiriusXM, have also been acquired by Buffett and his team. Particularly, the former has burgeoned into a substantial position in the portfolio, notably with Berkshire’s preferred shares of Occidental. Buffett has commended Occidental CEO Vicki Hollub in his latest shareholder letter.
However, Buffett believes Berkshire Hathaway itself is the standout company to own. Not only does it boast a portfolio of exceptional equity investments, but it also possesses insurance, railroad, utility, energy businesses, and numerous other operations.
Buffett wrote to shareholders, “With our present mix of businesses, Berkshire should do a bit better than the average American corporation.” Moreover, Berkshire’s cash reserves and minimal capital requirements lead Buffett to believe it “should operate with materially less risk of permanent loss of capital.”
Buffett isn’t promising astronomical returns with an investment in Berkshire Hathaway. He acknowledges that the days of surpassing the S&P 500 are likely behind due to its mammoth size ($862 billion as of this writing). “Anything beyond ‘slightly better’ … is wishful thinking,” he commented.
It’s crucial to reiterate Buffett’s caution from the 2020 Berkshire Hathaway shareholder meeting. “I happen to believe that Berkshire is about as sound as any single investment can be in terms of earning reasonable returns over time, but I would not want to bet my life on whether we beat the S&P 500 over the next ten years.” Just because something should outperform the market fundamentally doesn’t guarantee it will.
Buffett’s Financial Commitment
Buffett’s wealth is profoundly intertwined with Berkshire Hathaway—roughly 99% of it. He emphasizes his family’s significant investment in Berkshire shares, highlighting his sister Bertie and her three daughters’ substantial stake.
In essence, Buffett is deeply invested in the success of Berkshire Hathaway and its shareholders. As he notes, “Caring doesn’t guarantee results, but it does guarantee attention.” And historically, Buffett’s attention holds considerable value.
Moreover, Buffett has been actively utilizing Berkshire’s excess cash by repurchasing shares of Berkshire Hathaway. Since mid-2018, when the board of directors revamped its capital return program, Buffett has bought back $74 billion worth of Berkshire Hathaway shares. As Buffett informs shareholders, “Such repurchases work to increase your participation in every asset that Berkshire owns.”
Despite Buffett’s belief that Berkshire holds businesses that should outperform the average corporation, the stock trades at a forward price-to-earnings ratio of just 17.7x, compared to the S&P 500’s forward PE of 20.8x. Additionally, Berkshire holds a substantial cash position of about $167.6 billion, while Buffett continues to repurchase shares every quarter. Both factors should theoretically grant the stock a valuation premium, making it an appealing bargain, particularly considering the businesses and equity portfolio it encompasses.
