Investing with Buffett

08/19/2013 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

With stocks rising to record highs on a weekly basis, it's difficult to outperform the market these days. But a number of blue-chip stocks have managed to do just that, observes Ian Wyatt, editor of $100k Portfolio.

Wells Fargo (WFC) continues to lead the big-bank renaissance, rising 23.5% year-to-date on ever-improving earnings.

American Express (AXP) shares have advanced nearly 30% in 2013, as credit spending has returned, as the US economy improves.

And DirecTV (DTV) has shot up 20.5% as consumers flock to digital television with DVR capabilities.

By owning shares of Berkshire Hathaway (BRK.B), you essentially own a slice of all those stocks.

They have helped Berkshire outperform the market yet again in 2013, posting 25% gains year-to-date and continuing to climb after reporting a 46% profit increase in its second-quarter earnings. But outperforming the market is nothing new for Berkshire Hathaway.

Since legendary investor Warren Buffett took control of the former textile company in 1965, Berkshire Hathaway has grown its book value by an average of nearly 20% a year. That's more than double the 9.4% annualized return of the S&P 500 during that time.

In a nutshell, Buffett, and his business partner, Charlie Munger, have the best long-term investment track record in the world.

Berkshire Hathaway's outstanding track record is the reason I added the stock to the $100k Portfolio back in March 2011. "Why try to beat Warren Buffett when you can invest with him?" I reasoned then.

So far the stock hasn't disappointed. It's up 47% in less than two and a half years. Given Berkshire's historical track record of close to 20% annual returns, that's essentially par for the course. That performance is likely to continue in the years ahead, even after Buffett is no longer running the company.

Berkshire Hathaway is sitting on a mountain of cash. In the last year, the company generated cash flow of $12.5 billion. That means more than $1 billion in positive cash is flowing into Omaha every month.

The company's balance sheet is cash rich too. Berkshire already has $44 billion in cash and $31 billion in bonds. With a stockpile of nearly $75 billion, Berkshire is highly liquid and prepared to make big acquisitions.

The company doesn't issue a dividend, and probably never will—at least not while Buffett is the CEO. In fact, he said as much during the company's recent earnings call.

"Most companies pay consistent dividends, generally trying to increase them annually and cutting them very reluctantly," Buffett said.

"At Berkshire, however, we have consistently followed a different approach...We will stick with this policy as long as we believe our assumptions about the book-value buildup and the market-price premium seem reasonable."

Buffett has been adamant over the years that he prefers to save his cash for acquisitions and individual stocks. Berkshire does, however, issue occasional stock buybacks.

The next time that happens, it could be a windfall for an already thriving stock. The last time Berkshire Hathaway offered to buy back a substantial amount of stock was September 2011. Within a month, the stock was up 21%.

Even if Buffett decides not to repurchase shares, however, Berkshire is well positioned to continue achieving market-beating returns in the coming years.

For one, the company could instead use its cash for a new acquisition. Buffett already made one major purchase earlier this year, acquiring Heinz for $23 billion, back in February. He's clearly on the prowl for more acquisitions—"elephant hunting," Buffett has called it in his last two shareholder letters.

Above all, Berkshire's investment track record is probably the best reason to add the company to your portfolio. You don't double market returns for half a century by accident. It takes a truly brilliant investment mind like Buffett's to achieve those returns with such consistency.

Buffett has built Berkshire into something quite unique. It's a lean, agile company that owns, outright, hundreds of the best businesses, big and small. Plus, it has a diverse investment portfolio of some of the best individual stocks and bonds money can buy.

But you don't have to buy them yourself. By simply buying shares of Berkshire Hathaway, you gain access to that diversity—a portfolio of stocks as varied as Coca-Cola (KO), DirecTV and Wells Fargo.

That's why I decided to invest in Berkshire in the first place. And that's why I plan to add to our Berkshire position again.

It's important to have diversity in your portfolio. And buying more Berkshire Hathaway shares is like buying a mutual fund or an ETF—it provides considerable diversify by allowing us to own many of America's best companies in one fell swoop.

Currently, our Berkshire position comprises 2.5% of total assets in the $100k Portfolio. I plan to increase that position to roughly 5% of our portfolio. The stock has been a big winner for us already, and I expect that performance to continue in the years ahead.

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