Warren Buffett Thinks You Should Buy This Stock in 2014

Many have begun to question the ability of Berkshire Hathaway and Warren Buffett to beat the market in recent years, but one reality will stun investors.

Apr 6, 2014 at 11:25AM

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:

Source: www.multpl.com

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.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information