Inflation, recessions, rising interest rates – Warren Buffett has seen it all before. The Berkshire Hathaway CEO’s approach to investing never changes and never goes out of style.
A central part of the Oracle of Omaha’s strategy is holding investments for long periods of time. This approach has produced some spectacular results.
Compounding returns
One of the most obvious examples of this is Coca-Cola. Since Buffett first bought the stock in 1988, the share price has increased by around 9.5% per year on average.
By itself, that might not sound like a spectacular return. But over 34 years, it adds up to something quite amazing.
Since 1988, the Coca-Cola share price has increased by 2,171%. And that’s before accounting for the dividends that the company has paid out.
In my view, there’s an important lesson for investors like me here. The lesson is that the really big gains from the stock market take time to develop.
That means that it’s important not to be drawn into selling investments too early. With quality investments, it’s best to give them time to develop.
In my portfolio, I have a few stocks that Warren Buffett owns in the Berkshire Hathaway portfolio. But there’s one in particular that I’m planning on holding forever.
Citigroup
The stock is Citigroup (NYSE:C). I see this as a company trading at a very attractive price with some clear catalysts that can help it to do well in the future.
Right now, the stock trades at a price-to-book (P/B) ratio of around 0.5. That’s significantly lower than JP Morgan (1.6), Bank of America (1.3), and Wells Fargo (1.2).
There’s a reason that Citigroup’s shares trade at a lower valuation than those of its peers. The reason is that it has historically been less efficient.
Citigroup has consistently managed a lower return on equity than Bank of America, JP Morgan Chase, and Wells Fargo. As such, the stock has traded at a lower multiple.
That could be about to change, though. Citigroup is currently restructuring its operations to make them more efficient, which involves selling off a number of its businesses.
At its most recent investor day, Citigroup’s management stated that they were aiming for an 11% return on equity. If they can achieve that, then I think that the stock is a bargain.
An 11% return would put Citigroup roughly level with its peers. In other words, I think that Citigroup shares are cheap compared to what the company could turn out to be.
Buying and holding
There’s always a risk with stocks and Citigroup is no exception. If management can’t reach its 11% return on equity target, then returns could be disappointing.
But the low valuation on the stock more than offsets this risk, in my view. As I see it shares are just too cheap to miss.
That’s why I’m looking to follow Warren Buffett’s approach and hold my Citigroup shares for decades. If I can avoid having to sell, I think that I’ll do very well.
