An investment must take more risk to obtain better returns, according to investing fundamentals. But occasionally, a low-risk investment can beat the S&P 500. Warren Buffett recommends Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in his latest shareholder letter. Buffett may be biased because much of his $135 billion net wealth is invested in the company where he is CEO. His rationale is sound, and the stock is appealing.
Berkshire Hathaway has outperformed the S&P 500 since Buffett took over in 1965. Its compound yearly growth through 2023 was 19.8% vs 10.2% for the index. Buffett claims those market-troubling returns are over.
He expects Berkshire to do "a bit better than the average American corporation," but "anything beyond'slightly better,' though, is wishful thinking." Buffett's Berkshire Hathaway portfolio of partly and totally owned firms is extraordinary. He mentions Coca-Cola, American Express, and Berkshire's expanding interest in Occidental Petroleum as great companies.
Its major operations include a leading insurance company and a railroad, which earned $37 billion last year. Its $155 billion Apple investment is its largest. That stake was established with a big 2016–2018 investment. Buffett's loyalty to Apple is unquestioned despite a recent stake transaction. Over 40% of Berkshire's stock.
After 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies," Buffett wrote to investors in Feb. Not only does it own a portfolio of excellent firms, Buffett's other judicious investment has helped it avoid financial collapse.
Berkshire Hathaway's cash and equivalents have grown to $168 billion in recent years. That mostly goes to short-term Treasury notes. Buffett added, "Your company also holds a cash and U.S. Treasury bill position far in excess of what conventional wisdom deems necessary." He calls this cash position "akin to an insurance policy on a fortress-like building thought to be fireproof." He prefers being very careful with Berkshire and its investors' money.
The large cash position can insulate it from a U.S. recession. A lot of cash hurts investment returns. Berkshire investors benefit from Treasuries earning more than 5% annual interest, which reduces this drag.
The rate won't last forever. After the latest FOMC meeting, Federal Reserve Chairman Jerome Powell reiterated the Fed's 2024 interest rate reduction forecast. Berkshire continues to generate tens of billions in free cash flow, so Buffett will need a stronger investment for his enormous cash hoard soon.
Not easy. He says it's harder to obtain a game-changing investment as the company grows. His latest favorite approach to deploy cash is through Berkshire Hathaway's substantial share repurchase program. That investment is profitable, and Berkshire's share price allows it to continue.
Buffett says Berkshire can't outperform the S&P 500 by 9.5 percentage points per year anymore. Its risk-adjusted returns outlook is promising. Its financial reserves are sufficient to protect its railroad and insurance companies in a recession. If the market drops, Berkshire might invest with its cash.
Meanwhile, its diverse investment portfolio lets it fully participate in U.S. economic growth. Overall, the company's partly and entirely owned businesses make it well-diversified if one struggles. At 23.7 times last year's operating earnings, the stock is attractively priced, even without equity portfolio gains. Considering Buffett's "slightly better" stock picks' long-term outperformance, it appears inexpensive.
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