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Warren Buffett Thinks You Should Buy This Stock in 2014

Warren Buffett thinks you should buy his stock Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) this year. And you'd be smart to listen to him. Here's why.

The first five-year lag
Much has been made of the reality that, for the first time in its history, Berkshire Hathaway saw its growth in book value trail the S&P 500 over a five-year period.

As a result, many have questioned if Buffett has finally lost it, and others believe Berkshire Hathaway should be cast aside for different compelling investments. Yet, such a plan would be a terrible idea.

During the true market cycle from 2007 to 2013, Berkshire outperformed the S&P 500, and Buffett noted, "through full cycles in future years, we expect to do that again." Yet, Buffett added a critical distinction about what to truly expect from Berkshire Hathaway.

Setting expectations
When discussing the results of Berkshire Hathaway, Buffett said:

Charlie Munger, Berkshire's vice chairman and my partner, and I believe both Berkshire's book value and intrinsic value will outperform the S&P in years when the market is down or moderately up.

Source: Company Investor Relations.

But this isn't simply some prideful assertion. There have been 15 years in which the S&P 500 has been down or moderately up in Berkshire Hathaway's existence. And as shown in the chart, Berkshire Hathaway has delivered a resounding victory in those years.

The expectations for 2014
With that in mind, it's important to remember that countless people believe 2014 will be a year "when the market is down or moderately up."

FactSet, a research firm, noted in January that market strategists projected the S&P 500 would fall by 2.3% during he next 12 months. Industry analysts weren't quite so bearish, but projected, instead, a 4.8% rise in prices.

Acclaimed investor Seth Klarman -- who manages a hedge fund with $27 billion -- recently said he was "confident that these good times will come to an end," and expected 2014 to be a difficult year.

But simply surveying qualitative expectations and estimations is all too often a terrible idea, and a glance at the quantitative figures reveals an even more staggering reality.

From qualitative to quantitative
One of the reasons many people have been concerned about the market itself is the remarkable rise in relative valuation during the last few years. The acclaimed Shiller P/E Ratio -- the stock price divided by its inflation-adjusted earnings during the past 10 years -- from Nobel laureate Robert Shiller, reveals that stocks are indeed becoming increasingly more expensive relative to historical trends:


In fact, in the 49 years during which Berkshire Hathaway has existed, there have only been 10 years in which the Shiller P/E Ratio was higher than the 25.3 to begin 2014. And the returns in the one year that followed reveals Berkshire Hathaway's book value growth topped the S&P 500 eight of the years by an average of 6%. Not bad.

Yet, The Motley Fool doesn't believe in simply holding onto a company for a year or two -- and certainly neither does Buffett -- and expanding the time horizon to five years after the Shiller P/E has been this high further highlights Berkshire's success.

Source: Company Investor Relations and author calculations.

As you can see, during the 10 times when the market was valued higher than it currently is, Berkshire Hathaway delivered dramatically better returns during a five-year period. On average, Berkshire Hathaway grew its book value by an annual return of 9.4% in the following five years, whereas the S&P 500 has only returned 2.4%.

But that remarkable outpacing isn't exclusive to just a five-year period. When a 10-year period is considered, the results are even more striking:

Source: Company Investor Relations & Author Calculations.

While the gap is narrowed slightly, Berkshire Hathaway resoundingly beats it, once again. The S&P 500 delivered an average annual return of 3%, and Berkshire saw its book value rise to 9.5%. And although a difference of 6.5% per year may not sound like a lot, the S&P 500, on average, saw a 10-year total return of just 35%, compared to a staggering 150% by Berkshire Hathaway.

The takeaway
Attempting to time the market is a dangerous game, and the numbers shown above shouldn't serve as a deterrent to anyone investing. In the course of a lifetime, placing money every month into the S&P 500 has been a true success story for millions of investors who have been able to retire rich.

However, Buffett has a resoundingly successful history of outperformance in seasons both good and bad, which is one reason why Berkshire Hathaway presents itself as a compelling investment consideration.

The greatest thing Warren Buffett ever said
As you likely know, Warren Buffett has made billions through his investing, including his remarkable outperformance of the market. But he's happy to share the countless things he's learned, and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Read/Post Comments (11) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2014, at 4:05 AM, Interventizio wrote:

    Good article. The Shiller PE graph is somewhat scary.

  • Report this Comment On April 08, 2014, at 11:54 AM, Mathman6577 wrote:

    Good article.

    What are thoughts are Icahn Enterprises (a similar business to Berkshire)?

    I just read a quote from Warren that recommended investing in index funds (unless you really know the company you plan to invest in).

  • Report this Comment On April 08, 2014, at 12:13 PM, Archaeologist77 wrote:

    Good article. On the issue of the "monthly small investor." Generally, we follow the rule "keep broker fees below 2%."

    So I did some informal calculations on the scenario based on an average small investor who is investing $200/month.

    What I found is that it is better to transfer $200/month to one's discount broker account and buy shares of S&P 500 or better yet, BRK-B on a quarterly basis, rather than monthly using the accumulated cash total in the account.

    Quarterly investing reduces broker fees to an almost insignificant percentage and so percentage gain in the first year of purchase of shares will be higher that are otherwise reduced or cancelled out by broker fees. Now multiply this times 30 years and it becomes is a significant difference. Did I make an error in this analysis?

    Maybe others have a comment to make on monthly versus quarterly for the small investor who is saving/investing only around $250/month OR LESS.

  • Report this Comment On April 08, 2014, at 12:22 PM, LassFoolA wrote:

    Love you guys!

  • Report this Comment On April 08, 2014, at 1:23 PM, dreamimmigrant wrote:

    BRK pays no dividends and has underperformed the S&P during the bull run. Buffett himself loves dividends but advices his shareholders to stop asking for dividends and just sell shares from their small number of shares if they wanted a dividend.

    If you get into BRK now, you're too late into the party. The stock is a laggard and he needs to get more suckers in. Hence the appeal.

  • Report this Comment On April 08, 2014, at 1:24 PM, dreamimmigrant wrote:


  • Report this Comment On April 08, 2014, at 1:36 PM, AnsgarJohn wrote:

    Mathman read "Superinvestors of Graham and Doddsville" by Buffett

  • Report this Comment On April 08, 2014, at 1:43 PM, Pancakes22 wrote:

    The market will be either down or moderately up this year.

    Who would've ever guessed the market would ever do such a thing!

  • Report this Comment On April 08, 2014, at 3:00 PM, PatientInvest0r wrote:

    Nice article

    I like Mr.Buffet and Mr. Munger philosophy on investing however their stock is not for me. Mr. Buffet does often sell to negate capital gain tax, his favorite hold time is forever.

    Using the same philosophy, i cant invest with them because they do not pay dividend. I would have to sell to see any profit from BRK.B. If and when they start paying dividend then I will jump on board. Show me the money. They just do not fit my investment philosophy of dividend growth right now.

    Respectfully Foolish!

  • Report this Comment On April 08, 2014, at 3:05 PM, PatientInvest0r wrote:

    Correction: Mr. Buffet does not sell his holdings often to negate capital gain tax, his favorite hold time is forever.

  • Report this Comment On April 09, 2014, at 12:18 PM, FoolishMikee wrote:

    @TMFMorris: As one of the most seasoned Buffett/Berkshire writers, yet another compelling article backed by sound statistical evidence.

    In Berkshire's 1997 Chairman's Letter, Mr. Buffett noted that: "we expect over time to maintain a modest advantage over the Index, and that is the yardstick against which you should measure us." However, it makes sense that Berkshire Hathaway will underperform the market in a year in which there is a "cheery consensus."

    @dreamimmigrant you seem to be exaggerating the underperformance of Berkshire since the low in 2009. Since then, BRK.A has "only" underperformed by around 10%. It makes perfect sense for him to not distribute dividends while at the same time accumulate dividends from subsidiaries and investments as by his estimates he can put that money to work and earn a higher return which would be passed onto the investor through capital gains than the average investor can earn from their dividends (which suffer tax) and then reinvest that.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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9/4/2015 4:00 PM
BRK-A $196501.00 Down -3164.00 -1.58%
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Berkshire Hathaway CAPS Rating: *****