The Vanguard of Investment
When navigating the turbulent seas of investment, one often subscribes to the notion that higher rewards entail higher risks. However, every so often, fortune smiles upon us, unveiling an investment avenue that promises to outshine a formidable index like the S&P 500 without the looming specter of excessive risk.
In his recent epistle to shareholders, the venerable Oracle of Omaha, Warren Buffett, extols the virtues of Berkshire Hathaway ((NYSE: BRK.A) (NYSE: BRK.B)), touting it as one such investment. While acknowledging his vested interest in the company, where the lion’s share of his $135 billion fortune is entwined, Buffett’s rationale is grounded, offering a seductive allure to prospective investors.
“Slightly Better” in the Landscape of Business
Since assuming the reins of Berkshire Hathaway in 1965, Buffett orchestrated a symphony of success that eclipsed the S&P 500. The stock, under his astute stewardship, notched a compound annual gain of 19.8% through 2023, in stark divergence to the index’s 10.2% march. Yet, Buffett cautions that the halcyon days of market-beating returns are in the rearview mirror.
Prognosticating that Berkshire is poised to outperform “a tad better than the average American corporation,” Buffett admonishes against harboring hopes of soaring beyond this benchmark, branding such aspirations as a mere flight of fancy.
Berkshire’s treasure trove comprises a medley of partially and fully-owned businesses that stir admiration. From stalwarts like Coca-Cola and American Express to the burgeoning stake in Occidental Petroleum, the company’s investment roster exudes opulence.
The jewel in Berkshire’s crown is its thriving insurance arm and a railroad among its core ventures, yielding a bountiful $37 billion in operating earnings last year.
Its magnum opus, however, lies in its colossal investment in Apple, a behemoth valued at approximately $155 billion. While a recent share sale injected a modicum of uncertainty, Buffett’s unwavering commitment to Apple echoes loud and clear. This investment towers over Berkshire’s stock holdings, accounting for over 40% of the total.
“After 59 years of meticulous curation, the conglomerate stands at the helm of diverse businesses that, on a weighted scale, boast superior prospects compared to their industry peers,” Buffett effused in his missive to shareholders in February.
Yet, beyond its portfolio of titanic enterprises, Berkshire is fortified against financial jeopardy through another sagacious move by Buffett.
The Grand Impeccability: Berkshire’s Protective Mantle
In recent years, Berkshire Hathaway witnessed a monumental upsurge in its cash and equivalents holdings, swelling to a staggering $168 billion. Primarily parked in short-term Treasury bills, this cash reservoir caused even Buffett to censure its exorbitance, deeming it “redundant” in conservative circles.
Buffett likens this opulent cash vault to an insurance policy safeguarding an indomitable fortress against unforeseen perils. While this war chest shields Berkshire from the ravages of a potential recession, the flip side is its penchant to dilute investment returns. However, amid the prevailing interest rates, Berkshire draws over 5% in annual interest on its Treasuries, assuaging investor concerns.
Alas, this cozy arrangement may be ephemeral. Federal Reserve Chairman Jerome Powell’s avowal to trim interest rates in 2024 post the Federal Open Market Committee (FOMC) rendezvous poses a conundrum for Berkshire. As the company continues to amass billions in free cash flow, Buffett faces the onus of deploying this burgeoning cash pile judiciously.
Finding a needle that moves the haystack becomes an escalating challenge as Berkshire’s girth expands. A favored avenue of deploying capital of late has been through Berkshire Hathaway’s robust share repurchase program, a stratagem that has paid dividends and is poised to continue its efficacy given Berkshire’s current stock valuation.
Is Berkshire the Cupbearer to Your Portfolio?
Though Buffett avers that the era of Berkshire outpacing the S&P 500 by a lofty 9.5 percentage points annually is behind us, the stock unearths a compelling narrative of risk-adjusted returns that sing to prudent investors.
With a cash reserve robust enough to shield its core businesses of insurance and railroad against economic tempests, Berkshire remains poised to capitalize on investment opportunities in the event of market convulsions.
Moreover, its expansive investment bouquet ensures full immersion in the heartbeats of U.S. economic expansion. The broad spectrum of partially and wholly-owned businesses furnishes Berkshire with a cushion of diversification, should a solitary entity encounter turbulence.
Traded at an appealing valuation of merely 23.7 times the previous year’s operating earnings, Berkshire stands as an underpinning of potential that transcends the numerical realm. Its allure is accentuated when considering the probability of Buffett’s slyly superior stock selections surging over the long haul.
Presuming the role of a wise steward, choose your investments sagaciously.
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 and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.