The S&P 500’s average price-to-earnings ratio has climbed to levels rarely seen in recorded history. Its Shiller P/E ratio (like a 10-year average) has climbed to levels rarely seen in recorded history. Its average price-to-sales ratio has climbed to… Well, you get the idea. 

On many metrics, the most comparable period in the stock market was the dot.com boom. An perfect memory isn’t required to recall that little episode didn’t end up being a great time for growth stocks. 

But this time is different, isn’t it? Fears of stretched valuations and crazy share prices are overblown, aren’t they? That’s because artificial intelligence is well on its way to supercharging profits and transforming the economy, isn’t it? 

Isn’t it…?

Alarming news

An MIT study released in recent days revealed an alarming bit of news. Of initiatives across companies to use AI to increase productivity or efficiency, 95% of them failed to make a return on investment. In other words, only one in 20 firms is using AI profitably. 

Those are crazy numbers, and it seems like the alarm bells are percolating to mainstream news outlets too. Here are a couple of headlines that caught my eye, all from the last four or five days as I write this:

The Guardian: “Is the AI bubble about to burst – and send the stock market into freefall?”

The Telegraph: “The warning signs the AI bubble is about to burst”

Forbes: “Is The AI Bubble Bursting? Lessons From The Dot-Com Era”

Personally, these worrying details have caused me to reallocate a portion of my portfolio into a 4%-returning Cash ISA. Not too much of my holdings in percentage terms, mind. If AI does end up bringing home the bacon, then I’m still well placed to benefit. 

But a risk-free 4% sounds attractive for the next year or two. And if the AI bubble does pop? Then I’ll have a chunk of dry powder to snap up stocks on the cheap. 

A different approach

I’m not the only investor keeping a tranche of their portfolio in cash either. Warren Buffett’s Berkshire Hathaway (NASDAQ: BRKA) has built up a $354bn cash position while whittling equities down to $272bn. The world’s most famous investor has taken a look at the markets and chosen to have more in cash than in stocks!

Berkshire has long been famous for its above-market returns, going back to the 1960s. Will this unprecedented building up of cash be yet another prescient move? Will Buffett and I come out laughing? No one can say for sure. And for potential investors of the $1trn market-cap conglomerate, the recent announcement that Buffett will leave his post by the end of the year is another risk to bear in mind. 

But for anyone looking to swerve the AI mania and take a value investing approach, all while outsourcing the nuts and bolts of portfolio selection, Berkshire Hathaway stock is one to consider.

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That said, I think it’s a useful exercise to ponder which select few shares I’d own, if I had to choose. It makes me focus on what I consider to be absolute quality.

So, here’s my three stocks.

Going for value

For my first pick, I’m going with Warren Buffett. Or, to be more exact, his holding company Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).

Firstly, this stock would give me incredible diversification. That’s because Berkshire owns some 65 companies across many industries, including insurance giant GEICO and See’s Candies.

It also has positions in around 50 stocks, including massive stakes in Apple and Bank of America. And it owns 400m shares of Coca-Cola, worth about $25bn today.

Plus, the company was sitting on $129bn of cash at the end of 2022. This massive cash pile gives it enormous scope to buy more shares or make acquisitions.

Finally, I like that the stock tends to perform well in troubled markets. For instance, the S&P 500 is basically flat over the last two years, while Berkshire stock has risen 18.5%.

The flip side to this is that the shares could temporarily underperform if growth stocks came back into vogue.

Going cashless

The second stock I’d buy is Visa, which is also owned by Buffett. Its card network facilitates electronic transactions between consumers and retailers in more than 200 countries.

It’s one of the most stable businesses around, reflected in an operating margin that rarely fluctuates outside of the 62%-66% range.

Today, most transactions in the world are still cash-based. So the runway of growth still ahead of the firm seems enormous to me.

Some see cryptocurrencies as a threat to Visa, as such peer-to-peer payments could bypass its network. But I highly doubt the company is threatened. In fact, it’s just started connecting crypto and blockchain networks to its own global payment network.

Going for growth

Thirdly, I’d go with Scottish Mortgage Investment Trust (LSE: SMT). It was launched in 1909 to provide funding to rubber plantations in Malaya amid soaring demand for tyres for the newly created auto industry.

A quick look at the portfolio today shows me I’d be investing in a quite different beast from my previous picks.

Indeed, I’d hope the shares would work somewhat inversely to Berkshire. That is, by outperforming during bull markets and underperforming in times of uncertainty.

Importantly, the trust would also give me exposure to the world’s fastest-growing private companies. These include battery maker Northvolt — with its stated aim to “make oil history” — and SpaceX, which is revolutionising access to space with the ultimate goal of inhabiting other planets.

I’d find it hard to get access to such companies anywhere else — and certainty not for an ongoing charge of 0.32%.

That said, investing in private companies can create problems. Currently, the market fears that the present valuations of the trust’s private holdings may have much further to fall.

As a result, the shares now trade at a massive 20.9% discount to the net asset value (NAV) of the trust.

However, I think this provides some margin of safety for new long-term investors today.

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But what if I’d invested just one year ago? Has Warren Buffett — the chairman and CEO of Berkshire Hathaway — been able to beat the index?

A good year?

With £500, naturally I wouldn’t have been able to afford a Berkshire ‘A’ share a year ago. Instead I would have had to buy the ‘B’ shares.

Class B shares, first issued in 1996, are more modestly priced and have a correspondingly modest share of equity value in the company.

So, one year ago, I could have just about afforded two Berkshire B shares with my £500. And today, that those two shares would be worth 1.5% more than they were a year ago.

That’s not a great return. However, the weakening pound would have inflated the value of my investment. Today, I’d have about £560 as the pound is around 10% weaker.

However, these returns are relatively impressive when we consider that the S&P 500 — an index tracking the stock performance of 500 large companies listed on stock exchanges in the US — is down 19% over 12 months.

Is now the time to buy?

There’s only one thing stopping me buying Berkshire Hathaway shares, and that’s the strength of the dollar. With the exception of Liz Truss’s time as PM, the pound has never been weaker against the dollar.

The problem is, any gains I’d make through buying and holding Berkshire Hathaway shares could be wiped out by an appreciating pound.

To some, that might not sound too likely right now. But I can’t see things getting much worse. The UK’s economic performance is weak, but something has to change.

And exchange rate fluctuations can have a disproportionately large impact on investments. For example, the pound was down 20% versus the dollar (over 12 months) at its nadir this year. Currencies can fluctuate as wildly as stocks.

But when it comes to the Berkshire portfolio, who am I to comment? Buffett is one of the most successful investors in the world, delivering massive returns over his five decades at the helm.

Yet it’s worth noting that he and vice-chairman Charlie Munger are both in their nineties. They’re unlikely to be running the company for much longer. Although, I’d expect their successor(s) to carry on their success.

The portfolio actually has a rather limited number of holdings (53) considering its size ($680bn). Only one of which is a British firm. But this is because Buffett likes to stick to what he know and only invests in quality companies. This is just one of the core tenets of his value investing strategy that has served the business so well.

The post If I’d invested £500 in Berkshire Hathaway shares 1 year ago, here’s how much I’d have now! appeared first on The Motley Fool UK.

Higher prices make shares less attractive to investors like me. It means that I have to pay more for the same stocks that I was buying last week and last month.

That makes it harder to find attractive opportunities. But Activision Blizzard and Berkshire Hathaway are stocks that I’m happy buying for my portfolio today.

Berkshire Hathaway

Let’s start with Berkshire Hathaway. Share prices have been going up across the board and Berkshire’s shares are 11% higher than they were a month ago.

That means the stock is less attractive than it was a month ago – I’d rather buy shares at $276 than at $306. But Berkshire is still one of my best shares to buy right now.

The company is facing a number of headwinds at the moment, most notably inflation and the possibility of recession. But I think that Berkshire’s strength will see the business do well over time.

Unlike other insurance companies, Berkshire invests its float in common stocks, rather than bonds. This allows it to earn a greater return than its competitors, which allows it to buy even more stocks.

Why don’t other insurance companies do this? Investing in stocks rather than bonds requires substantial cash to cover the possibility of underwriting losses. Berkshire has this, but other insurers don’t.

In other words, Berkshire’s biggest advantage is its balance sheet. This allows it to be conservative in its insurance writing and to invest at higher rates of return than its competitors.

Activision Blizzard

Activision Blizzard is also one of my best shares to buy right now. In a turbulent market, I think that the stock offers a degree of predictability that is hard to find at the moment.

Since the company is the subject of a takeover bid, the investment thesis isn’t entirely about its earnings. Microsoft is attempting to buy Activision in its entirety at a price of $95 per share.

Today, the Activision share price is $80. This implies a gain of just over 18% if the deal goes through. 

There’s a risk that the deal might not complete, though. If it doesn’t, I think that the stock is likely to fall to around $67, meaning a probable downside of around 16%.

I think that the deal is likely to go through, though. That means that I think the stock is attractive on a risk vs. reward basis.

It’s not just me that thinks this. Yesterday’s 13F filings revealed that Warren Buffett has been buying shares as well.

Shares to buy now

The stock market looks uncertain to me at the moment. Rising share prices are making stocks riskier, so I’m looking for opportunities that are as straightforward as possible.

That makes Activision Blizzard and Berkshire Hathaway two of the best shares for me to buy today. Activision’s future is relatively clear one way or another, and Berkshire has enduring strengths.

As such, with £500 to invest today, I’d look to buy both stocks. 

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Three of my investments, however, aren’t like that. There are three stocks in my portfolio that I don’t anticipate selling at any price.

This is because they are the highest-quality businesses I own. So if I sold the shares, I don’t think I’d be able to replace them with an upgrade.

Disney

The first stock I’d never sell is Walt Disney (NYSE:DIS). Both the stock and the business have had a turbulent time over the past few years, but I’ve never been tempted to sell my investment.

Like any investment, Disney stock carries some risk. In my view, the biggest risk comes from the cost of continuing to create new content, which could weigh on investment returns.

I think, however, that Disney’s content library gives it a huge advantage over its competitors that offsets this risk. Furthermore, the strength of the company’s back catalogue is basically impossible for rivals to replicate.

Disney is the only stock in this list that I’m actively buying at the moment. I think that the stock is currently undervalued and I’m looking at increasing my investment in the business.

Realty Income

I also have a substantial investment in Realty Income (NYSE:O) that I don’t ever intend to sell. Instead of selling, I plan to keep reinvesting dividends to increase my passive income.

Realty Income is a real estate investment trust (REIT) that makes money by leasing retail properties. Like other REITs, it distributes its rental income in the form of dividends.

The company is exposed to risk in the form of high property prices, which is making expansion difficult. But it has navigated these challenges well before and I think it will continue to do so.

Twenty-eight years of consecutive dividend increases make the stock a Dividend Aristocrat. It also reinforces my belief that the business can perform well in any economic environment.

Berkshire Hathaway

Lastly, I own shares in Berkshire Hathaway (NYSE:BRK.B). This is another stock that I never anticipate selling.

The risk with this stock is that the size of the underlying business limits growth opportunities. But I think that patience will be rewarded over time.

In my view, Berkshire has a unique advantage. It uses the money it receives from insurance premiums to make investments that power its earnings.

This is a good business model, but it takes a lot of capital to make it work. Underwriting its insurance obligations requires significant cash to cover potential losses.

Berkshire’s big advantage is that it has the cash to operate in this way. Other insurance operations don’t have the same protection.

This allows Berkshire to avoid unnecessary risk and be conservative in its insurance underwriting. I think this advantage is durable and so I’m never selling the stock.

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But generally, investors tend to think of any sustained upwards run as a bull market. And any significant downwards spell is a bear market. Typically, the average bull market has lasted around five years. The average bear, meanwhile, continues for a little more than a year.

Might long-term investors be better of if that was the other way round, with more falls than rises? Wouldn’t we have more opportunities to buy cheap shares?

To answer that, I can’t think of anything better than looking at how the billionaire boss of Berkshire Hathaway, Warren Buffett, deals with stock market falls.

In the few weeks after the Covid-19 pandemic struck, the S&P 500 fell 30%. The recovery was surprisingly fast, with the index regaining its ground by August. The FTSE 100 took quite a bit longer, mind.

What happened the next year, in 2021? The S&P 500 gained 28.7%, while Buffett’s Berkshire Hathaway slightly bettered it with 29.6%. Buying shares while they were depressed by the pandemic was clearly a good plan.

Major bear market

But that’s nothing compared to the carnage resulting from the the financial crash, which kicked off in 2007. Between a high point in October that year, and the beginning of March 2009, the S&P 500 crashed by a whopping 56%.

Berkshire Hathaway suffered too, albeit with a softer fall of 32%. Now what do we see if we wind forward a decade? From the depths of the banking crash in 2009, the S&P 500 had gained 280% by the same point in 2019. Buffett’s shareholders did a bit better on 290%, and they’d started from a significantly lower initial fall.

Just like the Covid market slump, the financial crash provided investors with a great time to buy. And those who were panicking and selling while shares were down? Well, we can see what they missed.

Fear and greed

Buffett is famed for buying heavily when he sees great companies unfairly marked down. In his 1986 letter to Berkshire Hathaway shareholders, he explained how he avoids trying to time the market bottoms. Instead, he said: “Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.“

That approach to bear markets has served Buffett, and his shareholders, well.

From Buffett taking control of Berkshire Hathaway in 1965 up to the end of 2021, the S&P 500 managed a total return (including dividends) of more than 30,000%. Berkshire, meanwhile, soared by a total of 3.6 million percent!

We’re not all going to be as good as Buffett. But even investors who make regular purchases in an index tracker will benefit from bear markets over the long term. The simple truth is that when markets are down, we can buy more shares for the same money.

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Quality is invaluable

It’s no secret that Warren Buffett only invests in quality stocks that provide good value. Over his decades of investing, he’s reiterated that a good investment has three main factors:

1. A good valuation with room for growth.
2. Strong pricing power and fundamentals.
3. An excellent moat with a margin of safety.

This is evident when analysing his company’s portfolio. The firm has positions in many of the world’s biggest companies. Many of these stocks have one thing in common. They’re market leaders that exhibit quality profit margins and healthy fundamentals.

A buffet of stocks

As the US S&P 500 flirts with bear market territory, the Oracle of Omaha has been going on a shopping spree. Warren Buffett has been buying shares in excellent companies for cheap valuations, having done the same during the 2008 financial crisis. He’s made mistakes in his investing career too, but he learns from them and moves on.

Be fearful when others are greedy, and greedy when others are fearful.

Warren Buffett

The current forward price-to-earnings (P/E) multiple for the S&P 500 stands at 16.6. This is below the five-year average of 18.6, and 10-year average of 16.9. As such, Warren Buffett has increased and even bought positions in several blue-chip stocks. These include PC giant HP, oil behemoths Chevron and Occidental Petroleum, and recently, entertainment conglomerate Paramount Global.

These purchases allow Warren Buffett to dollar cost average, as he continues to buy value stocks on the dip. Berkshire’s move to increase its stake in oil also allowed the firm to capitalise on sky-high oil prices. This has allowed the fund to hedge against the potential slowdown in earnings from its other positions. Consequently, Berkshire Hathaway has outperformed the S&P 500 by almost 20% this year.

Keeping it simple

Warren Buffett has always stressed on keeping investing simple. Buy shares in a great business for less than it’s worth, with managers of the highest integrity and ability. But what is a great business? As hinted at earlier, these are businesses with low debt, high levels of cash, healthy margins, strong growth, and an inelastic good/service. While this may seem simple, companies exhibiting all these traits are difficult to find.

So, despite already having an array of renowned names on his portfolio, the 91-year-old has expressed his regret in not purchasing shares of several top US companies. One is a personal favourite of mine, Alphabet. Although the tech giant came short of earnings expectations recently, he sees plenty of promise in the Google-owning firm. With a 20-1 stock split around the corner, I think Berkshire may add Alphabet to its portfolio. If so, I’d be even more confident in Warren Buffett’s ability to continue beating the stock market.

The post How does Warren Buffett beat the stock market? appeared first on The Motley Fool UK.

Apple 

According to Berkshire Hathaway‘s (NYSE: BRK-A) SEC filing, Warren Buffett’s largest holding is Apple (NASDAQ: AAPL). Via Berkshire, Buffett owns 5.55% of the US tech giant’s total shares — a whopping 43% of his equity portfolio. Buffett began building a stake in Apple in 2016 and in his annual letter to Berkshire shareholders he praised CEO Tim Cook for Apple’s share repurchase strategy. 

One factor behind Buffett’s bullishness is the iPhone maker’s competitive advantage. Apple’s ecosystem is created by establishing market standards, encouraging developers to build apps tailored specifically to Apple smartphones. This produces a virtuous cycle, making Apple products indispensable. 

Nonetheless, Apple supplier Foxconn recently suspended its Shenzhen production due to a Covid-19 outbreak in the region. The Apple share price is still high for me, despite being down almost 14% on a three-month basis. Currently, I’m reluctant to deploy a significant amount of my cash reserves buying Apple in one go.

Indeed, Warren Buffett bought his position at an average cost of a quarter of today’s price. I will be buying steadily over the coming months to capitalise on any further dips in Apple’s share price. 

Bank of America 

At over 13% of Berkshire’s holdings, Bank of America (NYSE: BAC) is the second-largest constituent of Warren Buffett’s portfolio. The stock’s P/E ratio of 11.63 fits with Buffett’s value investing philosophy. Shareholders also benefit from a handy dividend yield of over 2%.

The Federal Reserve is tipped to hike interest rates in 2022. Bank of America should benefit from these macroeconomic conditions. Moreover, with a total net income of $32m for 2021, the bank is well placed to build on strong fundamentals this financial year. 

The stock currently sits almost 20% below its 52-week high in mid-February. Furthermore, the US economy is flashing recession warning signs. Bank of America shares could face further pain, given the bank services around 67 million consumer and small business clients stateside.

Despite these risks, I see Bank of America’s current share price as an attractive entry point to add this Warren Buffett stock to my portfolio. 

Another way to invest like Warren Buffett 

Perhaps the easiest way to mirror Warren Buffett’s investments is buying Berkshire Hathaway shares. The company’s compounded annual gain of 3,641,613% dwarfs the 30,209% gain for the S&P 500 from 1964 to 2021. For me, Berkshire stock carries some of the diversification benefits of an index fund while providing an opportunity to beat the market. 

Investors may worry about Buffett’s age at 91 while Vice-Chairman, Charlie Munger, is 97. Berkshire Hathaway’s share price performance without the duo at the helm is untested. This doesn’t dissuade me from owning the stock, however. I see the potential for future leadership to emulate Buffett’s investing approach beyond his lifetime. 

Berkshire currently has over $145bn in cash on its balance sheet and insurance is a large part of its business. A useful reminder for me that, with share valuations riding high, cash is king for scooping up bargains in the event of a stock market crash. 

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Massive loss of market capitalisation

The revelation caused Meta stock to plunge. And at $238 yesterday, the stock was down more than 25% in just one day. That’s a big move for such a mega-cap company. The market capitalisation was reduced by more than $200m. And according to analyst Graham Neary, that’s the biggest one-session loss of capitalisation suffered by any company in history.

As I write, Meta Platform’s market cap is about $660m. And that means Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) is now valued higher by the market with a capitalisation of around $706m. The only companies valued more highly than Berkshire now are Apple, Microsoft, Google owner Alphabet, Amazon and Tesla Motors.

Warren Buffett is rising up the rankings, and rightfully so. The way Buffett has guided the conglomerate to earn annualised returns of 20% since 1964 is nothing short of amazing. It’s the consistency of growth that’s so impressive. And the master investor has done it with a diverse range of businesses and stocks covering several sectors.

I think the widespread nature of his investments makes Berkshire Hathaway stand apart from the other seven mega-caps mentioned. Each of those businesses was built on a narrower focus and operations mainly in just one sector. I’d describe those companies as being driven by entrepreneurial forces, whereas Berkshire has been powered by Buffett’s flair and skill as an investor.

I’d follow Warren Buffett

But is the plunging Meta Platform’s stock price a buying opportunity? The stock could bounce higher again, but it’s not for me. I think there’s a risk that social media platforms could be shunned by investors in the years ahead because of the addictive nature of the services provided to consumers. And I’m also mindful of the many platforms that have risen in popularity only to plunge back down again. For example, it wasn’t so long back that Myspace was hot.

On top of that, I was sceptical when Facebook changed its name to Meta Platforms. It seemed to me the company might already have seen the writing on the wall and was perhaps acting to find new markets to preserve revenue. However, the idea that some alternative reality may catch on baffled me. I like real life, thank you very much!

I’d be much more inclined to look for opportunities to buy shares in Berkshire Hathaway, such as dips, down-days, corrections and bear markets. But I’m even keener on applying Buffett’s well-documented stock-picking methods to choosing my own shares for a portfolio.

There are no guarantees of a positive investment outcome because all shares carry risks, as we’ve seen with Meta Platforms. However, I think a few well-chosen stocks would work well in my portfolio alongside a selection of index tracker funds. And I’d choose my stocks from both the UK and North American stock markets.

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However, in recent years, doubters have started taking pot-shots at the 91-year-old guru. The stellar performance of Berkshire Hathaway (NYSE: BRK.A), his conglomerate, has eased off over the past decade. In the last five years, Berkshire stock has gained 91.3%, versus 92.9% for the S&P 500 index (all returns in this article exclude dividends). But over the past 12 months, Berkshire stock has leapt 35.7% — more than double the S&P 500’s 17.4% gain. So, for the past year at least, backing Warren Buffett was once again a wise move.

‘The Queen of the bull market’

Since 2019, one major contender has stepped up — a challenger to seize the throne and take the crown from the world’s greatest investor. She’s Cathie Wood, manager of the wildly popular ARK Innovation ETF (NYSEMKT: ARKK). Wood, a 66-year-old devout Christian from Los Angeles, named her fund group Ark Invest after the Biblical Ark of the Covenant. And in 2020, her ARKK exchange-traded fund’s performance was nothing short of heavenly, easily thrashing Warren Buffett’s returns.

Cathie Wood has managed the ARKK ETF since it was launched on 30 October 2014. This New York-listed ETF invests in ‘disruptive innovation’ in fields such as DNA sequencing and genomics, automation and robotics, green energy, artificial intelligence, and fintech (financial technology). Thus, Wood’s fund is heavily weighted towards highly rated tech stocks — with the largest holding being electric carmaker Tesla.

From its launch in late 2014 to peaking in February 2021, ARKK delivered a colossal return of 683.6%. In other words, $1,000 invested in this ETF at launch would have been worth over $7,836 at the peak price of $159.70 on 16 February 2021. But such market-thrashing returns rarely persist and quite often become a flash in the pan. On Friday, ARKK closed at $68.91, having collapsed by more than half (-56.9%) from its all-time high. So far in 2022 — just a month into the year — ARKK has crashed by more than a quarter (-27.2%). And over 12 months, the stock has collapsed by 51.7%, making it one of the worst-performing US ETFs over one year. So much for Cathie Wood stealing Warren Buffett’s crown.

Warren Buffett trounces Cathie Wood over one year

Though I admire and respect Cathie Wood, her reputation relies on just three outstanding years: 2017, 2019 and 2020. Here’s how ARKK has performed since end-2014.

As shown, ARRK had three dull years, three exceptional years, and an awful 2021. Thus, its five-year gain has declined to 207.9% — still an excellent return. However, with the stock now deep into bear territory, anyone backing Cathie Wood since late June 2020 will have lost money (on paper or in reality). Meanwhile, investors backing Warren Buffett have been handsomely rewarded. Over one year, $1,000 invested in Berkshire stock would be worth more than $1,357 today, versus $483 in ARKK.

In short, ARKK’s collapsing stock over the past year has cost Cathie Wood’s fans billions of dollars. Meanwhile, Berkshire Hathaway’s market value has soared to nearly $700bn. This has added almost $30bn to Warren Buffett’s personal wealth. That’s why he’s still my hero!

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