One of the fundamental tenets of investing is that an investment usually requires higher than average risk to achieve higher than average returns. However, in some cases, S&P500 without high levels of risk.
Warren Buffett suggested this in his latest letter to shareholders. berkshire hathaway (NYSE: BRK.A) (NYSE: BRK.B) is one of those investments. Mr. Buffett may be a little biased. Almost all of his $135 billion net worth is invested in the company of which he is CEO. But his reasoning is sound, and the stock looks attractive.
That's why Buffett believes his company's stocks can outperform with less risk.
“Slightly better” than the average American company
Since Buffett took control of Berkshire Hathaway in 1965, Berkshire Hathaway's stock price has outperformed the S&P 500 index. The annual compounded return to 2023 was 19.8%, compared with 10.2% for the broader index. But Buffett says the days of the market ravaging returns are behind us.
He said he expected Berkshire to perform “a little better than the average American company,” but cautioned, “However, expecting anything beyond 'a little better' is wishful thinking.” do.
Buffett has built a portfolio of partially and wholly owned businesses for Berkshire Hathaway, and the roster is impressive.He calls for long-term stock holdings coca cola and american express Berkshire stock is also on the rise. western oil Because we own parts of some great companies.
The company also owns major insurance and railroad businesses as core businesses, and generated $37 billion in operating profits last year.
The maximum investment holding is apple, worth about $155 billion. Its position was mainly built on huge investments from 2016 to 2018. Despite recent stock sales, there's no question about Buffett's commitment to Apple. This represents more than 40% of Berkshire's holdings.
“After 59 years of consolidation, the company now owns a portion or 100% of various businesses and, on a weighted basis, owns most of the U.S. “We have a somewhat better outlook than the big companies.”
But the company is well-positioned to avoid financial collapse, not only because it owns a portfolio of strong businesses, but also because of another smart investment by Mr. Buffett.
Huge protection policy on Berkshire's balance sheet
Over the past few years, Berkshire Hathaway's cash and equivalent holdings have grown to $168 billion. Most of it is invested in short-term government bonds.
Buffett said this amount may be excessive, saying, “Your company also has cash and Treasury positions that far exceed what conventional wisdom would require.'' . He says the cash position is “like an insurance policy on a fortress.” thought Still, he'd rather Berkshire and its investors be overly conservative with their money.
A large cash position can protect you if the U.S. goes into recession. On the other hand, large amounts of cash can hinder investment returns. The good news for Berkshire investors is that this drag is being eased by current interest rates. The company receives interest of more than 5% annually on its U.S. Treasuries.
But that rate won't last forever. Following the most recent Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Jerome Powell reiterated his expectation that the Fed will cut interest rates in 2024. Given that Berkshire continues to generate tens of billions of dollars in free cash flow, Buffett will soon need to find a better place to invest his ever-growing pile of cash.
It's not easy. He points out that as companies grow, it becomes harder to find truly transformative investments. One of his favorite ways to use cash these days is to take advantage of Berkshire Hathaway's robust stock repurchase program.
The investment paid off, and given Berkshire's current stock price, it's likely to remain in business.
Is Berkshire in your portfolio?
As Buffett points out, Berkshire is not in a position to generate annual returns that outperform the entire S&P 500 by 9.5 percentage points, as it has in the past. However, the outlook for risk-adjusted returns is very attractive.
The company has more than enough cash flow to protect its railroad and insurance businesses during an economic downturn. With cash reserves, Berkshire could find opportunities during market downturns.
Meanwhile, our existing extensive investment portfolio ensures full participation in the economic growth of the United States. Overall, the range of partially owned and wholly owned businesses means the company is well diversified should a single business face challenges.
Meanwhile, the company's stock is trading at an attractive valuation. That's just 23.7 times last year's operating profit, but that doesn't include potential gains from its stock portfolio. So when you include the possibility that stocks that are “slightly better” than Buffett's average stock picks will outperform over the long term, stocks appear to be undervalued.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has a position at 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.
Warren Buffett says one stock can outperform the S&P 500 with less risk (Originally published by The Motley Fool)
