As chairman and chief executive of Berkshire Hathaway, Warren Buffett’s been the driving force behind the company’s remarkable growth over the past six decades. But in 2021, 2022 and 2024, the company’s performance failed to beat that of the S&P 500.
Could this be a sign that the American billionaire’s lost his way?
I don’t think so.
Patience is a virtue
That’s because an investment horizon of four years is insufficient to make a sensible judgement. It’s the long term that counts. Personally, I think a 10-year period is reasonable when assessing a particular investment strategy.
With this in mind, the table below shows how Berkshire Hathaway has performed against the S&P 500 during the last six decades. And in each period, Warren Buffett’s come out on top. For example, from 1965-1974, Berkshire’s share price increased more than the index in six of the 10 years.
| Period | Berkshire Hathaway | S&P 500 |
|---|---|---|
| 1965-1974 | 6 | 4 |
| 1975-1984 | 8 | 2 |
| 1985-1994 | 7 | 3 |
| 1995-2004 | 6 | 4 |
| 2005-2014 | 7 | 3 |
| 2015-2024 | 6 | 4 |
| All years | 40 | 20 |
| Compounded annual gain | 19.9% | 10.4% |
In fact, over 60 years, it’s beaten the market on 40 occasions. The average annual increase in the company’s stock price over this period has been 19.9% compared to 10.4% for the S&P 500.
And if I’m honest, in my early days of investing, I did too much buying and selling. As I’ve got older, I’ve learned from my mistakes. Now, I aim to pick quality stocks and then forget about them. Short-term price fluctuations (up and down) are inevitable but – as hard as this can be sometimes — I try to avoid getting distracted by them.
On the defensive
That’s why I recently took a position in Babcock International Group (LSE:BAB), the FTSE 100 defence contractor. In 10 years’ time, I reckon it’s going to be bigger (and more profitable) than it is today.
I admit this is a sad reflection of the times in which we live. Increased political uncertainty means the world’s becoming more dangerous. But although I believe it’s the primary duty of government to protect its citizens, I acknowledge some investors don’t want anything to do with the sector.
However, as long as a company obeys the law — and pays its taxes — I would consider investing. And as far as I can tell, Babcock does both these things.
Growth potential
Positively, the group’s the second-biggest supplier to the Ministry of Defence and should benefit from the government’s commitment to increase military spending to 2.6% of GDP by April 2027.
By 2027, analysts are expecting earnings per share to rise 86% compared to 2024. The operating profit margin’s also expected to improve — from 5.4% to 7.9%. And the group’s predicted to move to a net cash position.
However, its near-£200m of cost overruns on a contract with the Royal Navy is a worry. Also, some investors might be concerned that the group’s shares are trading 10% above the consensus 12-month price target. But as I’ve said, I’m looking further ahead than this.
I don’t think Berkshire Hathaway has any defence stocks in its portfolio. But I think Babcock has many of the credentials that Warren Buffett looks for in a stock. It has a well-respected management team and it operates in an industry that’s growing fast.
That’s why I put it in my portfolio and why I think other long-term investors could consider doing the same.
