The boom in the market over the past 11 months or so has been quite remarkable. Since the end of March after the COVID-19 pandemic devastated the US economy, the S&P 500 increased by 75%. The technology Nasdaq performed even better, with the Nasdaq Composite Index more than doubling since the low.
This performance has left many investors worried about the fact that the market may be slightly overheated, and that we may cause the correction or an accident. But I’m not. While we could certainly see a decline in the market, long-term investors should welcome declines as opportunities to buy excellent businesses at a discount. With stocks like Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) as the backbone of my portfolio, I do not worry about the long-term direction of my net worth.
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Berkshire Hathaway in a nutshell
Most investors know Berkshire Hathaway as the company that made Warren Buffett rich, but many do not know exactly what Berkshire does. The answer is that Berkshire itself does not do much; it is a holding company.
Berkshire owns more than 60 subsidiary companies in various industries. Some well-known brands that are part of the Berkshire Hathaway universe include car insurance giant GEICO, Brooks running shoes, Duracell batteries, Fruit of the Loom clothing, Dairy Queen and Pampered Chef, to name a few.
In addition, Berkshire has a massive equity portfolio worth approximately $ 277 billion. About $ 117 billion of this is in the form of appeal (NASDAQ: AAPL) stock, but there are dozens of different positions in different industries.
Last but certainly not least, Berkshire prefers to keep a lot of cash on hand to take advantage of opportunities to acquire more companies and buy more shares. In fact, the word “tons” probably does not do it right. At the end of the third quarter, Berkshire had more than $ 145 billion in cash and equivalents on its balance sheet.
Boredom in all the right ways
Clearly, the businesses of Berkshire Hathaway are not quite as exciting as some of the big tech companies that are making the most headlines these days. Berkshire will never quadruple in less than a year Zoom (NASDAQ: ZM) nor will it be referred to as a game-changing innovator such as Tesla (NASDAQ: TSLA). But it’s OK. Berkshire is certainly boring compared to many of the popular stocks of today, but it is boring for long-term investors in the right ways.
The most important takeaway is that most of Berkshire’s businesses, as well as the investments in its equity portfolio, have been selected for their resilience. Consider major Berkshire subsidiaries such as GEICO, Duracell, BNSF Railway and Berkshire Hathaway Energy. They all sell products or services that people need, even if the economy is in a terrible state. The same can be said for many of Berkshire’s top investments, such as: Bank of America (NYSE: BAC), Coca-Cola (NYSE: KO), en Verizon (NYSE: VZ). There will always be a demand for safe places to keep money, food and drink, and reliable ways to stay connected.
Not only that, but also through Berkshire’s large cash supply, the company can benefit from difficult economies and put money to work while investing is cheap. The company’s Bank of America investment, for example, originated in the aftermath of the financial crisis when few companies had billions of cash right there.
How does Berkshire actually survive in difficult times?
So far, we have seen Berkshire perform theoretically well, no matter what the stock market or economy does. The proof, however, is in Berkshire’s 56-year record. Since 1965, the first year Buffett presented the show, the S&P 500 has delivered 12 times negative total returns. Berkshire has outperformed the S&P in all but two years, and often by a fairly wide margin. Sure, Berkshire’s strong performance in prosperous times was certainly the most important factor in its massively better performance over time, but the company’s ability to cope well with the bad years was almost as important.