This has been one of the wildest years on record for the stock market. Investors experienced about a decade's worth of volatility between late February and late August, with the benchmark S&P 500 losing over a third of its value, then quickly recouping all of its losses to hit a new high. All the while, millennial investors have loved every minute of it.
Online investing-app Robinhood has been particularly adept at attracting these millennial and novice investors. The app, which is known for gifting free shares of stock to new members and offering commission-free trades, added millions of new users in 2020, yet has an average age across its user base of only 31.
While it's great to see young investors putting their money to work in the greatest wealth creator on the planet, it's also a bit unnerving to see how they've chosen to invest their capital. Robinhood's leaderboard (a ranking of the 100 most-held stocks on the platform) is filled with a number of penny stocks and highly speculative companies.
A perennial top stock has been given the boot from Robinhood's leaderboard
But what might be even more unforgivable is allowing one of the top-performing stocks in history to fall off of Robinhood's leaderboard over this past week. Casual observers will no longer find Warren Buffett's Berkshire Hathaway (BRK.A 0.41%) (BRK.B 0.11%) as a top-100 Robinhood stock.
If you're wondering just how good Berkshire Hathaway has been for investors, how about this statistic: Between the beginning of 1965 and the end of 2019, Berkshire Hathaway's share price has increased in value by an annual average of 20.3%. An annual average... of 20.3%! By comparison, the total return (including dividends paid) for the broad-based S&P 500 is 10% over this same 55-year time frame.
As an aggregate, the S&P 500 has gained 19,784% between 1964 and 2019. Meanwhile, Warren Buffett's Berkshire Hathaway has increased in value by 2,744,062%, all while creating more than $400 billion in value for its shareholders.
I'm certainly surprised not to find Buffett's company in the top 100, especially for a group of investors fascinated with chasing big returns. But more than that, I'm betting that millennial investors are going to eventually regret their lack of faith in Berkshire Hathaway for three key reasons.
1. Having Buffett as your portfolio manager is a great thing
Buying Berkshire Hathaway stock makes billionaire investment-guru Warren Buffett your portfolio manager, in a roundabout way. Though Buffett is by no means perfect, his ability to identify plain-as-day values and companies with sustainable competitive advantages is arguably second to none.
What's truly interesting about Buffett's investing prowess is he's not doing anything that other retail investors couldn't themselves do. Though he has buying power that stretches beyond $145 billion, his primary means to generate wealth have been to:
- Focus on a handful of sectors/industries that interest him
- Hold onto investments for very long periods of time
- Pile into time-tested businesses that pay dividends
- Seek out trustworthy management teams
A 20.3% average annualized return over 55 years speaks volumes about Buffett's patient, detail-oriented investment approach.
2. Berkshire Hathaway's portfolio is a bet on U.S. and global economic expansion
Secondly, a bet on Berkshire Hathaway's stock is a simple numbers game that patient investors are very likely to win. Buffett and his investing team have packed the company's investment portfolio with information technology, consumer staples, and financial stocks. More than 90% of invested assets are currently tied up in these generally cyclical sectors.
Although recessions are a natural part of the economic cycle, periods of expansion and contraction aren't equal in length or stature. Recessions can often be measured in months or quarters. By comparison, economic expansions and bull markets usually last years.
Buffett's investment portfolio is designed to navigate its way through these short-term rough patches in order to generate impressive returns during these multiyear periods of expansion. Top-holding Apple, a number of big bank stocks, and brand-name giants like Coca-Cola are what help drive Berkshire's valuation higher.
As one additional note, don't forget that Berkshire Hathaway has acquired approximately five dozen businesses. The same thinking applies to a majority of these owned assets. An expanding economy will, over time, increase operating income for everything that Berkshire Hathaway owns.
3. The company's capital return program can still pay dividends
Robinhood investors are probably also overlooking Berkshire Hathaway's incredible capital return program.
One thing the Oracle of Omaha is not a fan of is using Berkshire's cash to pay a dividend. While Buffett's happy to collect well over $3 billion in annual dividend income from the various investments Berkshire Hathaway owns, his company won't be paying a dividend to its shareholders anytime soon.
Without a dividend, some folks probably assume that Berkshire Hathaway has no capital return program. But that's not true.
CEO Warren Buffett and his right-hand man Charlie Munger have the authority to repurchase shares of Berkshire Hathaway stock if there's more than $20 billion in cash on hand and both feel the company's stock is intrinsically cheap. In 2020, a record $15.7 billion in stock has been repurchased, with an aggregate buyback of close to $22 billion since mid-2018. Having fewer shares outstanding can boost earnings per share and make the company even more fundamentally attractive for value investors.
Suffice it to say, I hope Robinhood investors come to their senses sooner rather than later.