The market's rally over the past 11 months or so has simply been remarkable. Since bottoming in late March after the COVID-19 pandemic wreaked havoc on the U.S. economy, the S&P 500 has risen by 75%. The tech-heavy Nasdaq has done even better, with the Nasdaq Composite index more than doubling since the lows.
This performance has left many investors worried that the market might be a little overheated, and we could be due for a correction or crash. But I'm not. While we could certainly see a decline in the market, long-term investors should welcome declines as opportunities to buy excellent businesses at a discount. With stocks like Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) forming the backbone of my portfolio, I have absolutely no worries about the long-term direction of my net worth.
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Berkshire Hathaway in a nutshell
Most investors know Berkshire Hathaway as the company that made Warren Buffett rich, but many aren't exactly sure what Berkshire does. The answer is that Berkshire itself doesn't do much; it's a holding company.
Berkshire owns more than 60 subsidiary companies in a variety of industries. Some well-known brands that are part of the Berkshire Hathaway universe include auto insurance giant GEICO, Brooks running shoes, Duracell batteries, Fruit of the Loom clothing, Dairy Queen, and Pampered Chef, just to name a few.
In addition, Berkshire has a massive stock portfolio worth about $277 billion as of this writing. About $117 billion of this is in the form of Apple (AAPL -0.35%) stock, but there are dozens of different stock positions in a variety of industries.
Last but certainly not least, Berkshire prefers to keep a ton of cash on hand to take advantage of opportunities to acquire more companies and buy more stocks. In fact, the word "ton" probably doesn't do it justice. At the end of the third quarter, Berkshire had more than $145 billion in cash and equivalents on its balance sheet.
Boring in all the right ways
Clearly, Berkshire Hathaway's businesses aren't quite as exciting as some of the big tech companies that are capturing most of the headlines these days. Berkshire is never going to quadruple in less than a year the way Zoom (NASDAQ: ZM) has, nor is it going to be referred to as a game-changing innovator like Tesla (NASDAQ: TSLA). But that's OK. Berkshire is certainly boring compared to many of today's popular stocks, but it's boring in the right ways for long-term investors.
The key takeaway is that most of Berkshire's businesses, as well as the investments in its stock portfolio, were selected for their resilience. Consider major Berkshire subsidiaries such as GEICO, Duracell, BNSF Railway, and Berkshire Hathaway Energy. They all sell products or services people need, even if the economy is in terrible shape. The same can be said for many of Berkshire's top stock investments, such as Bank of America (BAC -0.21%), Coca-Cola (KO), and Verizon (VZ 1.17%). There's always going to be demand for safe places to keep money, food and beverages, and reliable ways to stay connected.
Not only that, but Berkshire's massive cash stockpile also allows the company to take advantage of tough economies and put money to work while investments are cheap. For example, the company's Bank of America investment originated in the wake of the financial crisis when few firms had billions in cash just sitting around.
How does Berkshire actually hold up in tough times?
So far, we've seen that Berkshire should theoretically perform quite well no matter what the stock market or economy is doing. But the proof is in Berkshire's 56-year track record. Since 1965, the first year Buffett was running the show, the S&P 500 generated negative total returns 12 times. Berkshire outperformed the S&P in all but two of those years, and often by a pretty wide margin. Sure, Berkshire's strong performance in prosperous times has certainly been the primary factor in its massive outperformance over time, but the company's ability to beat the market handily during bad years has been nearly as important.
