And those investors don’t come much greater than Warren Buffett. Indeed, this stalwart of Wall Street has been furnished with lavish praise over the years and, more importantly, he’s got the results to back it up.
So, let’s examine why Buffett’s investment company, Berkshire Hathaway (BRK.A)
, is the number one stock to buy right now.
A Strong Company With Many Moats
The sheer scale of Berkshire Hathaway’s business empire is simply awe-inspiring. The multinational conglomerate owns dozens of companies across a wide range of industries, and, while many people may know about its more high-profile holdings – such as Apple
and Dairy Queen – the enterprise has its fingers in many other pies as well.
In fact, Berkshire owns firms that operate in sectors as diverse as manufacturing, retail, food and beverage, insurance – and even railroads.
This level of diversification has served Berkshire well over the years, allowing the company to come through all manner of economic downturns relatively unscathed.
Furthermore, owning many different types of businesses gives the venture great power and influence in the marketplace. There are few industries where Berkshire Hathaway doesn’t have a significant presence – and that’s a testament to the company’s impressive business acumen.
Moreover, there are several reasons why having a diversified portfolio of shares is so essential. It helps balance out risk, and by having exposure to a wide variety of assets, a company like Berkshire can mitigate its exposure to any one particular investment.
Indeed, in the firm’s annual letter to shareholders, the company alludes to Berkshire’s “Big Four” giants. These are the brands and businesses that the conglomerate relies on to generate the bulk of its revenues and profits.
Leading this list is Berkshire’s cluster of insurance companies. Buffett believes these businesses “would be almost impossible
” to replicate, therefore providing the company with a near-impenetrable moat.
Another of these giants is BNSF, a railroad carrier that last year ferried over 530 million tons of cargo and traveled more than 140 million miles. Berkshire considers BNSF an “indispensable asset”
in the infrastructure of America’s commercial life, whose services will never be obsolete.
However, perhaps the best exemplar of Buffett’s much-vaunted moat-based investment philosophy is BRK’s $300 billion equity portfolio. Here you will see a selection of some of the finest companies on the planet, each sporting its own unique economic moat.
Taken together, these moats become much more than the sum of their parts – which is a big reason behind Berkshire’s phenomenal success.
Buffett’s Record Is Second To None
Since taking over the company in 1965, Warren Buffett has delivered an aggregate return of more than 3,600,000% for holders of Berkshire Hathaway’s Class A shares.
In fact, central to the investment style that conjured up these sorts of numbers is Buffett’s preference for dividend-paying stocks
. Indeed, BRK is on course to register over $6 billion in dividend payments alone in 2021, adding plenty of cash to the firm’s bottom line.
But given Buffett’s fondness for investing in these kinds of companies, it’s odd that he doesn’t extend the privilege to Berkshire’s own shareholders too.
Rather, Buffett prefers to redirect the company’s excess earnings into new projects and acquisitions to create long-term value for the business. In doing so, BRK’s resources are better apportioned under the stewardship of BRK’s management, instead of being repackaged as a distribution every quarter.
Moreover, Berkshire occasionally buys back its stock when it believes it is sufficiently undervalued. In fact, the company spent $27.1 billion on repurchases in 2021, with the end goal of giving shareholders a larger stake in the firm.
Indeed, there are many benefits to buying back stock. It reduces the number of shares outstanding, which can increase earnings per share, and returns value to shareholders in place of actual dividends. It also helps boost the company’s value by increasing demand for its shares.
Interestingly, shareholders don’t just benefit when the business buys back its own stock – they benefit when the companies held by Berkshire buy back their shares too.
For example, Apple is Buffett’s largest holding today at 42% of Berkshire’s entire portfolio. As it happens, the creator of the iPhone is extremely bullish when it comes to stock repurchases, having acquired around $550 billion worth of equities since its buyback program began in 2013. This action resulted in Apple’s share count falling by about 35%.
Furthermore, Apple’s aggressive policy has the ringing endorsement of Buffett as well, having remarked back in 2019 that he was “wildly in favor
” of the electronics giant snapping up its stock at such a blistering rate.
And who can blame him? As Apple’s single biggest investor, Buffett is also the single biggest beneficiary of all the benefits that come with these buybacks. For instance, BRK sees its interest in the stock shoot up, without, as Buffett says, having to “lay out a dime.”
Overall, Berkshire Hathaway’s strategy of reinvesting its earnings – and not paying a dividend – has contributed to the firm’s success over the years, making it one of the world’s most sought-after companies.
But it doesn’t end there. The company’s fine performance is ultimately due to the diligence and brilliance of those leading from the helm. In this regard, not only do Buffett and his partner Charlie Munger
possess two of the sharpest minds on Wall Street, but, as they say in their shareholder letter, their commitment to “integrity and capital” means that Berkshire “will behave well” in its future dealings.
Exceptionally 2022 Performance
Investors might have been disappointed at Berkshire Hathaway’s flat price action this year, with the conglomerate’s stock rising only 1.92% since January.
However, when compared to the broader S&P 500, Berkshire’s “alpha” rating is superb.
Indeed, alpha is a key measurement of a stock’s performance, specifically the excess return an investment makes relative to that of a benchmark index. In other words, it’s the portion of an investment’s return that’s not due to market movements.
Depending on how you assign systematic risk and the risk-free rate of return, there are a few different ways to calculate alpha. That said, one of the simplest ways to generate a rough number is to take the difference between an investment’s actual return and the return of the benchmark index.
Looking at BRK’s positive growth this year, it’s easy to tell just how well the Omaha-based investment vehicle has responded to difficult economic circumstances. Indeed, in the same period, the S&P 500 has declined by a massive 18.0%, with many other sectors of the market also faring just as poorly.
Is Berkshire Stock A Buy?
Since its inception in 1965, Berkshire Hathaway has been a juggernaut in the investing world. It has enjoyed a compound annual gain of 20% over that time, meaning that every dollar invested in Berkshire Hathaway 57 years ago would be worth upwards of $32,000 today. That’s an incredible return by any standards, but especially when compared to the wider market’s relatively measly return.
So what is it that makes Berkshire Hathaway such a great investment?
For starters, BRK is a collection of quality companies that operate in diverse industries. This diversification lowers the overall risk of its portfolio, as no one company can tank the whole thing.
Furthermore, Warren Buffett and Charlie Munger are two of the most successful investors ever, and they have a knack for finding and acquiring quality companies at low prices.
Finally, Berkshire has a remarkable track record of outperforming the market over the long term. This is due to its philosophy of buying quality companies and holding them for the long haul. So, if you’re looking for a low-risk investment with a proven history of stellar returns, Berkshire Hathaway is definitely worth a try.