Beat the Market With 1 Stock

Do you want the benefits of an index fund with none of the downside? There's a stock for that.

Feb 7, 2014 at 3:09PM

Index funds capture broad market trends, so they suit busy or uninterested investors. However, these funds have a big downside that engaged investors try to avoid: An index includes many grossly overvalued, failing, or otherwise undesirable companies that an educated investor would never directly buy stock in. Thankfully, there is a stock that can diversify your portfolio while adding only sound companies: Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B).

Berkshire owns dozens of companies across several industries, giving individual stockholders broad exposure with one holding, like an index fund. Yet unlike an index fund, Berkshire only holds companies that have been vetted by one of the best teams in finance. And, unlike a mutual fund or exchange-traded fund, Berkshire charges investors zero fees for that expertise. Even better, the stock has returned about 20% on average for nearly 50 years. Over time, 20% a year adds up, and Berkshire easily outpaces the S&P 500's gains (with dividends reinvested):

BRK.A Total Return Price Chart

Berkshire's gains are backed by solid and consistent metrics. By nearly every measure, Berkshire outperforms the market and is more reasonably valued than the market or individual stocks with similar returns. Below, compare Berkshire's book value and P/E ratio to the S&P 500's:

BRK.A Book Value (Per Share) Chart

The S&P comes with respectable metrics of its own, but Berkshire still does better.

S&P 500 P/E Ratio Chart

Berkshire isn't perfect, and other portfolios can beat its returns. However, the company tends to outperform even its best-performing blue chips over the long run. Let's have a look at some examples.

BRK.A Total Return Price Chart

American Express 
Some companies outperform Berkshire for years at a time, and American Express is one of the best examples. If you had bought Berkshire and American Express (NYSE:AXP) a year ago, American Express would be the stock boosting your portfolio right now. American Express continued a five-year winning streak and returned 50% last year, handily beating the market and Berkshire. Even as its stock price reaches new all-time highs, the price appears to be in line with solid growth: Revenue has been increasing steadily every year, and with its combined card and services business, the company maintains several lucrative revenue streams. Old and new shareholders have plenty of reasons to be happy with stellar capital gains, steady dividend growth and repurchases, and reasonable valuation metrics like a P/E of 17.6.

For a long-term portfolio, however, Berkshire stays on top. One of the main reasons is volatility: American Express has a beta about three times greater than Berkshire's, meaning it can also erase value that much faster. For example, by the pit of the recession in March 2009, American Express had fallen 83% from its 2007 high, while Berkshire was down 30%.

Wal-Mart 
Wal-Mart
's (NYSE:WMT) stock has dropped recently following lackluster big-box retail sales and broad concerns about global growth. However, the drop may be misplaced contagion. Here, Berkshire outperforms because it is diversified across sectors -- it tends to drop only when investors question the entire economy, not just one part. Wal-Mart is diversified within retail, and the business is steadily adding billions onto its revenue every year, even with unimpressive performance in certain divisions including Sam's Club. From 2012 to 2013, revenue increased $464 billion to $474 billion and earnings per share increased 6.8%. Additionally, Wal-Mart continues to increase its dividend and currently yields 2.6%. Wal-Mart won't rival Berkshire's returns any time soon, but it is a solid business whose stock is currently on sale.

ExxonMobil
ExxonMobil
's (NYSE:XOM) stock has taken a nose dive since the beginning of the year, and its recently reported fourth-quarter earnings haven't helped. Diluted EPS fell 13% from the prior-year quarter, and full-year diluted earnings were down 24% from the prior year. The only good news is that dividends have been steadily increasing. Berkshire may be getting a bargain with Exxon, but Exxon does not look to outperform the holding company anytime soon. Here, Berkshire's financial team shines: It cannot time the market, but it does do markedly better than most individual investors with regards to determining when the market's sentiments are not entirely based on a company's fundamentals -- and then buying low and selling high.

Easy decisions
If you are looking for an easy way to diversify, or if you are considering an index fund as one pillar of your portfolio, take a look at Berkshire Hathaway. The company has an unparalleled 50-year track record of delivering stable and market-beating returns to its shareholders. With no fund fees and dozens of excellent companies, this one stock can give your portfolio the benefits of an index fund and none of the downsides.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You've fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it's too late!

Calla Hummel owns shares of Berkshire Hathaway. The Motley Fool recommends American Express and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers