One of the most common investing principles is that you need to take on more risk to earn greater returns. Every now and then, however, the market will offer investors a great price on a solid company, presenting an opportunity to outperform the competition S&P500‘S (SNPINDEX: ^GSPC) returns without as much downside potential.
Warren Buffett is excellent at identifying these opportunities. His investment strategy of buying great companies at a fair price has delivered a compound annual return of 19.8% since his acquisition. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 1965. That definitely beats the S&P 500’s average total return of 10.2% over that period.
So when Buffett sees an opportunity in the market, investors pay attention. In his most recent letter to shareholders, he identified one stock that should be able to outperform the S&P 500 over the long term, without too much risk to investors.
A portfolio full of attractive companies
Buffett and his team manage a stock portfolio worth more than $384 billion. It’s full of solid companies and stocks that Berkshire could keep forever, according to Buffett.
In his letter to shareholders he called for: American Express And Coca-Cola, two of Berkshire’s top holdings, as investments he is expected to keep indefinitely. He added to the list Western petroleumof which Berkshire now owns approximately 28% of the outstanding shares following a recent purchase.
All three companies have enduring competitive advantages and strong management teams. Their valuations are attractive in the current market. Although Buffett has continued to add small pieces to Occidental, he has no plans to take majority control. Meanwhile, he doesn’t expect Berkshire’s stake in American Express or Coca-Cola to change.
That is by far Berkshire’s largest holding Apple. Buffett has called Apple a better company than any Berkshire owns. But he has sold shares over the past two quarters. He explained that the idea is to absorb the tax burden now, while the laws remain favorable. He expects Apple to remain Berkshire’s largest holding for the foreseeable future.
Buffett has built up a significant position over the past three quarters Chubb. Insurance stocks continue to trade at high values. Buffett sold other insurance and financial stocks to make room for them in Berkshire’s portfolio.
But none of them are the only stocks that Buffett believes should outperform the S&P 500. In a sense, they all are.
He thinks Berkshire Hathaway itself, including its stock portfolio, its entire holdings and its growing pile of government bonds, is the company he should own. “With our current mix of companies, Berkshire should are doing slightly better than the average American company,” Buffet wrote in his 2023 letter to shareholders. And while he expects above-average performance, he thinks Berkshire is well protected against economic downturns thanks to its huge cash position and limited capital needs. He says Berkshire”should also operate with significantly less risk of permanent capital loss.”
Investors should keep in mind that Buffett emphasizes what he believes should to happen. But predictions are difficult, especially about the future, even for the Oracle of Omaha. Moreover, he does not expect the enormous outperformance of Berkshire’s past. “Anything beyond ‘slightly better’… is wishful thinking,” he wrote.
Does Berkshire belong in your portfolio?
Warren Buffett is certainly a big believer in Berkshire Hathaway’s future. About 99% of his wealth is tied to the company. Additionally, much of his family is also invested in the company. And he genuinely cares about building wealth for all Berkshire shareholders.
To that end, he puts his money where his mouth is. During the first quarter, he spent $2.6 billion of Berkshire’s cash on stock buybacks. That brings its total share buybacks to more than $78 billion in just under six years. Each share repurchased increases shareholders’ remaining interest in Berkshire’s stock portfolio, its wholly owned companies and every asset on its balance sheet.
The stock currently remains attractive from a valuation perspective. Because shares trade at about 18.7 times forward earnings, the stock trades below the forward price-to-earnings ratio of the S&P 500. That’s despite Buffett’s expectations that Berkshire’s stock should perform slightly better than the average U.S. company . When you take into account the huge amount of cash on the balance sheet and the consistent share buybacks, that valuation looks extremely attractive.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions at Apple. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
The first stock that should safely outperform the S&P 500, according to Warren Buffett was originally published by The Motley Fool
