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It's definitely been a month to remember for Wall Street and Main Street. In a matter of roughly one month, the benchmark S&P 500 (SNPINDEX: ^GSPC) lost 32% of its value and wiped away three years' worth of gains. Continued uncertainty surrounding the spread of the coronavirus (COVID-19) remains the impetus that's pushed the stock market lower at its steepest trajectory in history.
At the same time, we've witnessed the world's leading economy slow to a crawl, with mitigation measures put in place in a number of states bringing nonessential economic activity to a halt. With no definitive end in sight, we're likely going to witness a truly historic rise in unemployment and a drop-off in gross domestic product in the near future.
And yet, the outlook for the U.S. economy and the stock market remains bright. That's because there will, eventually, be treatments for the novel coronavirus, as well as antiviral vaccines. Further, the stock market has put every single correction and bear market in history in the rearview mirror, meaning that buying during a downturn has always proved to be a smart move.
The $64,000 question is: Which stock(s) to buy?
What if I told you that you could buy into a company that has run literal circles around the benchmark S&P 500 for more than 50 years and that, if purchased, would offer immediate diversification? And no, I'm not talking about an exchange-traded fund or some sort of index-tracking trust.
This seemingly too-good-to-be-true company is none other than conglomerate Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B).
If the name doesn't immediately ring a bell, then perhaps its CEO, Warren Buffett, will jog your memory. Buffett has led Berkshire for more than 50 years, and over time, he's generated more than $400 billion in value for the company's shareholders. It's a big number, but it's even more impressive when you consider the starting point.
According to Berkshire Hathaway's annual shareholder letter for 2019, the S&P 500 has returned a compounded annual gain of 10% inclusive of dividend reinvestment since the beginning of 1965. This has led to an aggregate return of 19,784% in the S&P 500. Not too shabby for buy-and-hold investors.
However, Berkshire Hathaway's compound annual return over this same period was 20.3%, leading to an overall gain in per-share market value of 2,744,062%. As I said, this is a stock that's delivered market-trouncing returns, and Warren Buffett is the prime reason why.
Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.
You see, Buffett doesn't approach investing with the idea of making a quick buck. Ironically, one of his few short-term investments wound up shortchanging the Oracle of Omaha around $16 billion in future gains. Rather, Buffett focuses his attention on only a few sectors of the market and seeks to buy businesses that he views as having clear-cut competitive advantages. Once he buys into these businesses, he tends to hang onto them for an extended period of time.
For instance, Coca-Cola (KO 0.01%) has been a staple holding in Berkshire Hathaway's portfolio for more than three decades. There's absolutely no impetus to sell given that Coca-Cola offers brand-name beverages in all but one country worldwide and has 21 brands generating at least $1 billion in annual sales. In fact, Buffett has been holding onto Coca-Cola for so long that the $656 million in dividends Berkshire will receive this year equates to a 50.5% yield based on the company's initial cost basis of close to $1.3 billion. Essentially, Buffett doubles his money on Coke every two years.
The Oracle of Omaha also has an affinity for cyclical businesses that do well when the economy does well. That's a good thing, because the economy is in expansion mode far more often than it is contracting or in recession. For example, around 45% of Berkshire's portfolio is devoted to financials, more specifically banks, which are Buffett's favorite industry.
Image source: Getty Images.
Not only does buying Berkshire Hathaway stock essentially make Warren Buffett your money manager in a roundabout way, you'll also gain instant diversification.
On one hand, Buffett's close to $158 billion in invested capital (as of this past weekend) is held in 52 different securities (50 stocks and two exchange-traded funds/trusts). Though Buffett's portfolio definitely favors three sectors -- financials, information technology, and consumer staples -- you'll nevertheless gain some level of diversification via Buffett's investment portfolio by owning this stock.
Where the real diversification comes into play is with regard to Berkshire Hathaway's five dozen acquisitions over the years. Some of the more popular names Berkshire owns include insurer GEICO, fast-casual restaurant chain Dairy Queen, railroad operator BNSF, and jewelry chain Helzberg Diamonds. You'll gain exposure to retail, utilities, insurance, building products, media, real estate, and other financial services.
Understandably though, not even broad-based diversification is necessarily going to protect Buffett, his company, or Berkshire shareholders, from feeling the short-term pain of this steep descent in the stock market. However, the Oracle of Omaha has seen a bear market or two in his day, and he knows how best to put his capital to work to take advantage of these often short-term declines.
If you're looking to buy a stock during the COVID-19 crash that has consistently delivered market-topping returns for decades, Berkshire Hathaway might be it.