For nearly two months, Wall Street has been taken for quite the roller-coaster ride.
Following an all-time closing high for the benchmark S&P 500 (^GSPC -0.43%) on Feb. 19, it took just 17 trading sessions for the broad-based index to lose more than 20% of its value and fall into bear market territory. It also took a mere 22 trading sessions (about a month) to lose in excess of 30%. By comparison, previous bear markets have taken an average of 336 calendar days to reach losses of 30%.
Bear markets are a surefire opportunity for long-term investors to make money
There's absolutely no question that investors have had their resolve tested like never before. Then again, it also may be a perfect time to be a buyer, assuming you have disposable income to spare amid the current unprecedented disruption in the labor market.
While the stock market offers no guarantees, the closest thing to a surefire idea over the long run has been to buy high-quality stocks during stock market corrections and bear markets. That's because every single correction and bear market in history has eventually been completely erased by a bull market.
Sometimes it takes just weeks for this to happen, whereas in other instances, such as following the Great Recession and dot-com bubble, it took years. But make no mistake about it: Organic earnings growth tends to push stock valuations higher over the long run. That's why long-term investors who stay the course tend to be so handsomely rewarded.
Thus, the question isn't really whether you should be a buyer during a bear market -- it's what stock(s) should you buy?
This company has run circles around the S&P 500 for decades
Over the past couple of weeks, I've offered up numerous investment ideas, including growth stocks, value stocks, high-yield income stocks, and even small-cap stocks that investors can buy in this bear market. But perhaps the single greatest investment opportunity right now is a company that's averaged a 20.3% annual return (yes, averaged) since 1965. For context, this means if you had invested $100 in 1965 with this company and held for the past 55 years, you'd have had more than $2.7 million by Dec. 31, 2019.
This mystery company, which has outpaced the S&P 500's aggregate return, including dividends, by more than 2,724,000% since the end of 1964 and has gained at least a double-digit percentage in 35 of the last 55 years, is none other than Warren Buffett's conglomerate Berkshire Hathaway (BRK.A 0.20%) (BRK.B 0.15%).
Easily the most attractive thing about buying Berkshire Hathaway stock is that you're effectively making Warren Buffett your investment manager. Although Buffett has a team of investment managers, some of whom make purchases on their own, the Oracle of Omaha remains in charge of the lion's share of Berkshire's investment portfolio, which stood at almost $194 billion, as of this past weekend.
Buffett definitely brings what would today be viewed as a unique style of investing to the table. Rather than using fancy charting tools or throwing his weight around as an activist investor would, Buffett chooses to buy businesses with perceived-to-be competitive advantages and -- (here's the really important part) -- hangs onto them for a long period of time. Of Berkshire Hathaway's nine-largest holdings by market value, four have been held for at least 20 years (Coca-Cola (KO 0.13%), Wells Fargo, American Express, and Moody's). In fact, Berkshire Hathaway has such a low cost basis ($3.25) on Coca-Cola that Coke's aggregate annual dividend of $1.64 per share equates to a greater than 50% yield on cost.
This is a good time to point out that Buffett's portfolio leans heavily on cyclical business (i.e., those that do well when the U.S. or global economy are expanding). Although Coca-Cola isn't necessarily going to see a drop-off in consumption during a bear market, Buffett's favorite industry -- banking -- is certainly going to see less in the way of interest income and deposit/loan growth.
While that can be bad news during recessions, what's important to note is that the U.S. economy spends far more time expanding than it does contracting. This simple bet on the expansion of the U.S. and global economy is a big reason Buffett is so successful.
Another measure of success is that Warren Buffett tends to place a lot of focus on dividend stocks. This isn't to say that Buffett goes out of his way to avoid companies that don't pay a dividend, so much as to point out that he traditionally buys into businesses that are time-tested and comfortable with the idea of sharing a percentage of their profits with shareholders. By my calculations, Berkshire Hathaway is on track to generate around $4.7 billion in dividend income in 2020. Considering Buffett's all-in cost basis of $110.3 billion for his company's 52-security investment portfolio, this works out to a greater than 4% yield on cost.
Furthermore, Berkshire Hathaway acts as an acquirer of businesses. With Buffett at the helm, Berkshire has acquired in the neighborhood of 60 businesses from a variety of sectors and industries, including well-known brands such as railroad company BNSF, insurer GEICO, and confectioner See's Candies. Many of these companies have grown significantly over time and added to Berkshire Hathaway's bottom line.
Though it's easy to overlook Berkshire Hathaway in favor of other high-flying growth stocks, there's probably not a company out there with a better track record over the past 55 years.