Warren Buffett has done it again. The Oracle of Omaha is well known for being the investor who has beaten the S & P 500, Wall Street’s benchmark index, the most times, and this year his magic has been back. Berkshire Hathaway, its investment holding company, returned 3.3% in 2022, compared with a loss of 18.1% for US selectives with dividends reinvested. In this sense, the legendary investor’s financial holding company had not outperformed the index by such a wide margin since 2007. And it did so despite Apple, the largest holding in his portfolio with a weight close to half, falling more than 26% in the stock market.
Buffett has been helped by the fact that Berkshire owns a large stake in the oil company Chevron, which was the best stock last year on the Dow Jones with a gain of almost 50%. The holding company also owns a large part of Occidental Petroleum, which has more than doubled. Success has not rained down on him, but has come hand in hand with a long and dedicated effort to diversify his portfolio.
Buffett’s affinity for consumer stocks has also helped him get these results. Berkshire has large exposures to Coca-Cola and Kraft Heinz, which each rose about 10% in 2022 on the stock market. All in all, Berkshire lost a net loss for the first three quarters of 2022 due to the decline in the value of other major investments such as
Berkshire Hathaway’s operating profit, the measure that both Buffett and Wall Street analysts prefer to use as an indicator of the company’s health, will rise nearly 20% to $24.1 billion for the first nine months of the year.
Can Buffett and Berkshire do this again in 2023? More challenges lie ahead as oil prices plunge and inflation peaks. “That could hurt Berkshire’s huge energy and utility businesses,” Jefferies says in a recent report. “Higher interest rates could also continue to happen to Berkshire’s investment banks,” she adds.
Value in all sectors
Although Buffett is known as a bargain hunter, his recent track record shows that he does not shy away from adding to his positions even at higher prices. Apple, Chevron and Occidental Petroleum make up a combined 50% of Berkshire’s stock shares. However, Buffett has only bought shares of the Apple banner since 2016, Occidental since 2019, and Chevron since 2020, possibly because they still recognized that these shares were undervalued.
Berkshire’s public securities portfolio consists of more than 50 companies. But 85% of the portfolio is concentrated in the 10 largest holdings. Included in those top 10 positions are companies from the technology, finance, energy, consumer staples and telecommunications sectors. Berkshire has had companies like Coca-Cola and American Express for decades. But relatively recent moves show that Buffett and his team aren’t afraid to revamp their portfolio if they find value in other areas.
Given the investment style of Buffett and his team, it’s harder for Berkshire to beat a skyrocketing bull market than a flat or bear market. Berkshire’s returns from 2010 to 2022 show notable underperformance during years when the market was very good. For example, in 2020, the company returned only 2.4% compared to 18.4% for the S&P 500 with dividends reinvested. The previous year, it reaped 11%, compared with a total return of 31.5% for the Wall Street benchmark.
Buffett doesn’t tend to pay more for companies or chase market trends. So when valuations expand and unperforming growth stocks lead the market, Berkshire can be expected to make a below-average return. Similarly, if valuations are compressing and value stocks outperform growth, Berkshire could be expected to outperform the market.
However, given Berkshire’s concentration in just a handful of stocks, the company could underperform in a value-oriented market if there is a problem with one of the most prominent major holdings in the firm’s portfolio. . One of the main reasons Berkshire was able to beat the market in 2022 despite Apple’s underperformance was that the energy sector performed well. Chevron’s shares are up more than 58% in 2022, and Occidental’s are up 119%, more than making up for the pyrrhic behavior of the Tim Cook-led company.
Thus, Berkshire’s past performance and current protection indicate the benefits of operating a diversified portfolio with a principled strategy. Buffett’s holding company is sincere about its portfolio goal, which is to beat the market over the long term in a regimented way that doesn’t expose its investors to necessary risk.