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How is Warren Buffett investing – top picks of legendary investor

Berkshire Hathaway, with Warren Buffett and Charlie Munger, is consistently beating the S&P 500. What is their key to success?

Warren Buffett and Charlie Munger are two of the most active and well-known managers in the world of investing. There is no need to introduce such big names. Their brilliant sense for finding great companies is respectable. Below we describe the letter for investors in 2022, reported a few weeks ago, and the new picks and top holdings of Berkshire Hathaway. And of course, their strategy and history.

Brief history about Berkshire Hathaway

The holding company for the international corporation Berkshire Hathaway was initially established as a textile manufacturing business in 1839. 

Read our deep research on PLTR: Palantir Technologies: Profitability on the way in 2023 

During the 1839–1950 era, the Valley Falls Company, a Rhode Island–based manufacturer of textiles, served as the predecessor of Berkshire Hathaway. A group of investors led by Benjamin Graham, Warren Buffett’s role model, bought the business in 1955.

1960s: Early in the decade, Warren Buffett started purchasing Berkshire Hathaway stock, eventually rising to the position of majority shareholder. The firm was still largely engaged in making textiles at the time.

1970s: By buying a wide variety of businesses in numerous industries, Buffett started converting Berkshire Hathaway into a holding company in the 1970s. National Indemnity Company, a property and casualty insurance provider, and See’s Candies, a candy store, were two of the company’s early purchases.

1980s: Throughout the 1980s, Berkshire Hathaway continued to grow its assets through purchases, including the furniture store Nebraska Furniture Mart and the conglomerate Scott Fetzer Company, which has operations across several sectors.

1990s: Throughout the 1990s, Berkshire Hathaway made a number of notable purchases, including those of Fruit of the Loom and GEICO, two of the biggest car insurers in the US.

2000s to the present: Throughout the 2000s, Berkshire Hathaway kept expanding through acquisitions. Among these were the purchases of numerous major businesses, including the railroad Burlington Northern Santa Fe, the Lubrizol Corporation, and Precision Castparts Corporation.

Nowadays, Berkshire Hathaway operates as a diversified holding company with companies engaged in a number of different sectors, including manufacturing, retail, insurance, transportation, and energy. The business is renowned for its long-term investment strategy, methodical acquisition process, and leadership team of Warren Buffett and Charlie Munger.

Amazing historical returns and long-term beat of S&P 500

Berkshire Hathaway (under ticker BRK.B and BRK.A) invests among many companies but more than 50% of the weight is reflected by few companies. BRK.A only from its start – IPO in July 1979 to now made a tremendous 190 426% return, growth similar to making 466 790 USD from 245 USD. Berkshire did not start as a asset management company or holding company from the beginning, as we stated upwards.

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Historical performance is in favour of its management team, led by Warren Buffett and Charlie Munger, long-term experienced individuals. Its not just in the short-term, but also in the medium-term and even long-term beating S&P 500 evidence. CAGR (Compounded annual growth rate) of BRK is stunning 19.8% vs. S&P 500´s CAGR at 9.9% (including dividends).

Significant long-term outperforming of BRK, source: Investro Analytics Team

When we look at the dataset of returns from 2000, we can easily find out and calculate the CAGR and compare the performances. While, from the 2000, the investing world faced two significant sell-outs in 2000 to 2002 and from 2008 to 2009 and if we count the COVID-19 fast drop in 2020, we had a three solid declines. Once again, Berkshire significantly beat the S&P 500 from 2000 very dramatically, by 3.4% p.a. From 2000, S&P 500 (including dividends) earned 6.3% p.a.

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Berkshire did stunning 9.9%. So the very long-term and long-term time horizon is on the Berkshire side, which is consistently beating the market. From the point of view of long-term investing, its much better to invest in BRK shares rather than to S&P 500. The overall result has been also impacted by the BRK´s solid year in 2022, where the holding company added a solid 4%, while S&P 500 lost -18%. This is a great side of consistent and successful business-picking story.

Berkshire Hathaway vs. SPX (div. included), source: Investro Analytics Team

This is not the first time in history, when such solid result happened. Consistently outperforming in the bear markets is the great key to success in long-term investing. While corrections always matter, and the Berkshire with its management did many times better than S&P 500, that´s the key reason, why it has better CAGR. Look at the years 2000-2002, 2008 and 2022.

The key is in successful strategy

On the other hand, its not always the case that BRK can beat the market as you can see in 2003, 2009, 2019-2020. To be honest, its unmanageable to beat the market year over year consistently, however, Berkshire has a greater overall result mainly as its management is able to avoid significant losses during the bear markets.

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Its also implied by the key strategy the managers focus on. We reveal the strategy of Warren Buffett and Charlie Munger below. These key icons of the investing world prefer dividends picks and low-volatility stocks. They do not focus merely on price, but mainly in the companies core business models -> predictable earnings and cash flow. See the key notes from its strategy below:

  1. Substantial competitive advantage: Buffett and Munger favor companies that have a strong competitive advantage over their rivals, such as a well-known brand, a special product or service, or sizable economies of scale. In the long run, this aids the business in maintaining high profitability.
  2. Steady profits growth: They search for businesses with long-term, steady earnings growth. This shows the company’s capacity to produce substantial earnings and cash flows, which can be applied to dividends, share buybacks, or reinvestment.
  3. Straightforward and easy-to-understand business models are preferred by consumers.
  4. High return on equity: A high ROE shows that the company is making effective and efficient use of its resources.
  5. Low debt-to-equity ratio: They favor businesses that have this ratio since it shows that the business is not unduly dependent on debt to finance its operations. This lessens the possibility of bankruptcy and financial hardship.
  6. Steady and predictable cash flows: They seek out businesses with these characteristics because they make it possible for them to forecast future profits and returns.
  7. Strong management team: Buffett and Munger favor businesses with a management team that is capable, robust, and committed to the interests of the company’s owners. They seek out CEOs with a track record of achievement and moral character.
  8. Attractive valuation: They look for businesses that are trading below their true worth. They employ a range of valuation indicators, including price-to-earnings ratio, price-to-book ratio, and discounted cash flow analysis, to ascertain a company’s intrinsic value.
  9. Reduced capital expenditure needs: They favor businesses that don’t have to spend a lot of money on capital projects since they can create more free cash flow and invest it in new business ventures.
  10. Non-cyclical business: They seek out businesses that are less prone to market and economic volatility.
  11. Low operating costs: They favor companies that don’t need a lot of capital outlay for new machinery, technology, or R&D. Profits are increased and operating costs are reduced as a result.
  12. They choose industries with high entry barriers, such as those with stringent regulations, expensive capital needs, or proprietary technologies. By doing so, the danger of new competitors entering the market and undermining profitability is diminished.
  13. Good social impact: Lastly, Buffett and Munger favor businesses that advance society and have a positive social influence. These covers businesses with a focus on social justice, environmental sustainability, or philanthropy.

And one of the best Warren Buffett´s quotes:

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

Fulfilling such criteria in the long-term perspective helped them and Berkshire to become living legends among investors and helped to long-term outperformance. Below, you can see a “potential” 100 USD investment to Berkshire vs. S&P 500 (including dividends).

The additional returns, or spread between market and Berkshire yield, helped to make a great wealth of many customers and investors. The investment in late eighties did more than 50x fortune, while the investment into S&P 500 yielded more than 20x. Just amazing numbers.

100 USD invested in BRK vs. SPX, source: Investro Analytics Team

Berkshire Hathaway portfolio and new picks in 4Q2022

BRK increased the shares in AAPL (+334k shares at 134 USD), LPX (+1.25 mil. shares at 55 USD) and in PARA (+2.42 mil. shares at almost 18 USD).

Largest stock buys and sells in Berkshire Hathaway in 4Q2022, source: hedgefollow.com

But the most interesting part is the “sell side” as the holding significantly reduced its share in TSM (-51.77 mil. shares at 71.5 USD) and almost completely sold out USD, where the company sold 91.4% of its shares in the company. 

Below you can see top holdings of Berkshire Hathaway. As you can see, the Apple stands with almost 36% share, followed by Bank of America (BAC) with 11% share and Chevron (CVX) with 10%. Top 5 holdings account for 76% of the Warren Buffett and Charlie Munger´s portfolios in BRK. However, the portfolio consists of 50 picks.

Berkshire Hathaway portfolio, source: gurufocus.com

We are also preparing one more piece related to Berkshire Hathaway. Although some of the numbers were created with the help of the most current investor letter of Berkshire Hathaway, we will make a solid summary of the letter and discuss the dividend focus of these investing legends, which was revealed in late February. Stay tuned. 

Our Investro Analytics Team is made of financial experts and professionals who are creating content for you from all around the world. They do this by sharing their insights, ideas...

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