Over the stock market cycle between year-ends 2007 and 2013, we overperformed the S&P . Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results.
Investing great Warren Buffett wrote the above paragraph in his 2013 letter to shareholders of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). For those unaware, returns for an S&P 500 index fund will mirror the exact results of the S&P 500. Therefore, these results are considered average. But Buffett points out that investing in Berkshire Hathaway stock logically comes with an expectation for above-average returns.
With operations in seemingly stodgy industries like oil, banking, insurance, railroads, and more, one might think that Berkshire Hathaway stock is a poor idea for a market-beating investment. But in the near decade since he wrote these words, Buffett has indeed delivered for shareholders. If you invested $1,000 in this company 10 years ago, you'd have nearly $3,100 now. That's compared to the just $2,600 you'd have if you invested in an index fund (dividends excluded).
If you dissect Berkshire Hathaway into pieces -- and there are a lot -- you'll notice that the company is very different than it was 10 years ago. And this is because Buffett is determined to grow the per-share book value of the company at a market-beating pace, even if it means making changes.
How Berkshire Hathaway has changed
Berkshire Hathaway owns whole businesses outright and has a portfolio of publicly traded stocks. Buffett has said, "Our favorite holding period is forever." But regardless of that preference, he's still willing to make changes as needed to increase the company's book value.
On Aug 14, Berkshire Hathaway revealed the most recent update for its stock portfolio. The top five holdings by market value are currently Apple, Bank of America, American Express, Coca-Cola, and Chevron. But only two of these -- Coca-Cola and American Express -- were top 15 holdings back in 2013.
In 2013, Berkshire Hathaway's top five stocks by market value were Wells Fargo, Coca-Cola, American Express, Goldman Sachs, and Walmart. Given that Coca-Cola stock and American Express stock collectively pay $1.1 billion to Berkshire Hathaway every year through dividends, it makes sense that Buffett has held until now. But the company no longer owns any shares of the other three today.
Not only has Berkshire Hathaway's stock portfolio changed, but its wholly owned businesses also changed in importance. In 2013, Buffett referred to five companies (besides insurance) as his "Powerhouse Five" (MidAmerican Energy, Burlington Northern Santa Fe, Iscar, Lubrizol, and Marmon). Today he refers to just the "Big Four" (Burlington Northern, Berkshire Hathaway Energy, its insurance businesses, and Apple). But only two of the old Powerhouse Five -- BNSF railroad and Berkshire Hathaway Energy -- are part of the Big Four.
The Powerhouse Five were the companies providing Berkshire Hathaway with the highest earning power. That's what the Big Four do today.
Businesses and stocks that were once very important to Berkshire Hathaway a decade ago have dwindled in significance, whereas others have gained prominence. But all along, Buffett's decisions have been guided by increasing the company's per-share book value. And to that end, he's been quite successful, as the chart shows.
Some of Buffett's favorite investing metrics
Berkshire Hathaway is no growth stock, but returns have been sensational nevertheless thanks to savvy capital allocation by Warren Buffett. He spends money today to get more money later. That extra cash can come from the profits of his wholly-owned businesses. And it can also come from stock dividends.
By focusing on earnings, Buffett always has a pile of cash at his disposal. As of June 30, Berkshire Hathaway had over $130 billion in cash, cash equivalents, and short-term investments.
Moreover, by focusing on intrinsic value -- what he believes the company is worth -- Buffett has a good sense of when Berkshire Hathaway stock is undervalued. He uses these opportune moments to repurchases shares with his ample supply of cash.
As you may have noticed in the chart, Berkshire Hathaway has reduced its share count by nearly 12% over the last decade. This is why book value per share has grown faster than book value itself. And for what it's worth, Berkshire Hathaway's stock price has tracked closer to the book-value-per-share metric, as seen in the chart.
It's easy for investors to become enamored with the latest buzzworthy trend or the company with the hottest growth. But Berkshire Hathaway is a good reminder that market-beating investments don't necessarily always come from the next big thing. Buffett's approach can also lead to strong and steady gains in the stock market.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Goldman Sachs Group, and Walmart. The Motley Fool recommends Chevron and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.