For over half a century now Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has organized a clinic for Wall Street. Based on annualized total returns (including dividends) since the mid-1960s, the affectionately named “Oracle of Omaha” has practically doubled the benchmark S&P500 (19.8% versus 10.2%, as of December 31, 2023).
On a total return basis, the outperformance is even more pronounced: a total return of approximately 36,000% for the S&P 500, versus a return of nearly 5,000,000% for Berkshire’s Class A shares (BRK.A), through the closing bell on June 26, 2024.
Buffett’s ability to outperform Wall Street’s widely followed stock indexes is the result of a long list of factors, including:
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A desire to buy into companies that have clearly defined competitive advantages.
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Aimed at companies with strong, proven management teams.
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Berkshire Hathaway’s portfolio is filled with cyclical stocks that will benefit from disproportionately long periods of economic growth.
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Concentrating Berkshire’s 44-stock, $387 billion investment portfolio into a handful of Buffett and his team’s best ideas.
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Have enough cash on hand to take advantage of the inevitable Wall Street downturns.
But perhaps the most defining characteristic of Warren Buffett’s investment philosophy is his desire to own great companies for the long term. While the average holding period for stocks is less than a year, the Oracle of Omaha and his top investment assistants, Ted Weschler and Todd Combs, seek to hold on to what they consider great companies “indefinitely.”
While you’ll find plenty of stocks in Berkshire’s 44-stock portfolio that have been held for years, only three stocks have been continuously owned since 2000.
Coca-Cola: continuously owned since 1988
When it comes to its position in Berkshire Hathaway’s closely watched $387 billion investment portfolio, the beverage company is Coca Cola (NYSE:KO) reigns supreme. Buffett’s company has continuously owned shares of Coca-Cola since 1988 and, with a cost base of $3.2475 per share, generates a dividend yield on costs of almost 60% per year.
The beauty of consumer staples stocks like Coca-Cola is that they provide a basic product or service. No matter how well or poorly the U.S. economy and/or stock market performs, consumers still want beverages. This results in consistent and predictable operating cash flow year after year.
On a more company-specific basis, Coca-Cola has operations in every country except North Korea, Cuba and Russia (the latter having to do with the invasion of Ukraine). This virtually unparalleled geographic diversity allows the company to reap the benefits of steady operating cash flow in developed countries, while benefiting from continued organic growth in emerging markets. In total, Coke has more than 20 brands worldwide that generate annual sales of more than $1 billion.
Branding and marketing are additional reasons why Coca-Cola is a phenomenal long-term investment. Kantar’s annual “Brand Footprint” report notes that Coca-Cola has been the world’s most chosen brand on store shelves by consumers for 12 years in a row. The company’s marketing team leans on digital channels to engage its younger consumers and can still rely on its rich history and well-known brand ambassadors to connect with its adult audience.
Since Berkshire Hathaway receives $776 million in annual dividend income from its stake in Coca-Cola, there is absolutely no reason to sell this position.
American Express: Continuously held since 1991
A second stock that has been a fixture in Warren Buffett’s investment portfolio at Berkshire Hathaway for more than three decades is the credit services provider American Express (NYSE: AXP)‘AmEx’, as it is better known, has been a stable holding company since 1991.
AmEx is the epitome of the prototypical Buffett investment. It is a financial stock (Buffett’s favorite sector) with a well-known brand, a rock-solid management team, and cyclical.
While the Oracle of Omaha and Berkshire’s brightest investment minds know that U.S. recessions are a normal and inevitable part of the economic cycle, they realize that recessions are short-lived. Nine of the 12 U.S. recessions since the end of World War II have resolved in less than 12 months. Buffett likes to buy brand-name companies like AmEx and let them thrive during extended periods of economic expansion.
The not-so-subtle secret to American Express’ success is that it can profit from both ends of the transaction aisle. It is clearly the No. 3 payment processor by purchase volume via the credit card network in the U.S., which allows it to generate predictable fee income from merchants. At the same time, it is also a lender (via credit cards), which helps it generate annual fees and net interest income from its collective cardholders. When the U.S. and global economies are firing on all cylinders, this double-dip ability comes in handy.
Additionally, AmEx has historically done a fantastic job attracting higher-income individuals as cardholders. High income earners are less likely to change their spending habits or default on their bills during minor economic disruptions.
Finally, Berkshire Hathaway’s annual cost return for its stake in American Express (based on a cost basis of $8.49 per share) is a whopping 33%! In other words, Berkshire practically doubles its initial investment in AmEx every three years, based on dividend income alone.
Moody’s: Held continuously since public debut on September 30, 2000
The third company that billionaire Warren Buffett has owned continuously since 2000 is a credit rating agency Moodys (NYSE: MCO). Berkshire Hathaway has been a shareholder since Dun & Bradstreet spun off Moody’s in September 2000.
Moody’s long-term outperformance is a reflection of at least one of its two major operating segments firing on all cylinders at any given time.
Moody’s is best known for its Investors Service segment, which provides credit ratings for corporate and government debt. More than a decade of historically low borrowing rates spurred companies and government agencies to issue debt. This kept the fuel burning for Moody’s front-and-center operating segment.
But starting in March 2022, the Federal Reserve embarked on its most aggressive rate-hike cycle in four decades. As interest rates rose, the desire to raise capital through debt issuance became less attractive. As demand for corporate debt ratings has declined, the growth potential has shifted to Moody’s Analytics.
The company’s analytics segment offers various risk management, economic assessment and compliance solutions to its customers. In an environment where a number of predictive tools suggest a U.S. recession is coming — for example, the historic decline in the U.S. M2 money supply — risk management tools are a hot commodity.
Not to sound like a broken record, but Berkshire Hathaway also rakes in dividend income from Moody’s. Although new investors in Moody’s stock would only generate a return of 0.8%, Berkshire’s cost base of approximately $10.05 per share yields a return on costs of approximately 34%! The fact that Berkshire’s initial investment in Moody’s could triple every three years means there is no incentive for Warren Buffett to exit this position.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Moody’s. The Motley Fool has a disclosure policy.
Meet the Only Three Stocks Billionaire Warren Buffett Has Constantly Owned Since 2000, originally published by The Motley Fool
