Since taking the helm at Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) in 1965, Warren Buffett has steadily outperformed the overall stock market. Shares of his holding company are down sharply this year, but the stock is still up by an eye-popping 2,833,951% since its humble beginning.
Beating the benchmarks in any given year could be a matter of luck. After outperforming for nearly six decades, though, it's clear that Buffett's strategy is a winning one.
Warren Buffett at a conference. Image source: The Motley Fool.
Like nearly every successful investor in history, Buffett shares his ideas with anyone who wants to hear them. Plus, Berkshire Hathaway must disclose its trading activity at least once every three months.
The market has been generally lousy since the last time Berkshire Hathaway reported its trading activity. That means you can scoop up these stocks for significantly less than the Oracle of Omaha paid.
1. Markel
Markel (MKL -1.17%) is often called the stock market's baby Berkshire. The company's long-term shareholders consistently outperform the benchmark S&P 500 index. But that's not the only thing it has in common with Buffett's holding company.
Berkshire Hathaway and Markel both have relatively large insurance businesses. Markel gets an ultra-cheap source of capital in the premiums that it collects, because there's a delay between when policyholders pay their premiums and when Markel has to pay money back out to cover claims.
Instead of buying the same fixed-income securities most insurers rely on, Markel Ventures carefully uses its low-cost capital source to acquire controlling stakes in profitable companies that can produce heaps of value over the long run. In the first half of the year, the Markel Ventures segment recorded a $107 million profit.
Markel's stock price has been beaten down by about 23% from the high point it reached this spring because a big net loss of $916 million in the second quarter frightened investors. If you look a little closer, though, you'll see there's nothing to be scared of.
Markel's investment segment owns shares of stocks that fell hard in the second quarter, and due to recent changes in accounting rules, the insurer has to include those losses in its quarterly financial reports. A quick look under the hood shows that plunging prices in the company's stock portfolio were fully responsible for the heavy loss Markel reported. With its insurance and venture segments providing strong profits, the road ahead of this stock is going to be a lot smoother than its recent price performance suggests.
2. Ally Financial
Ally Financial (ALLY 0.13%) is easily the oldest all-digital bank in operation today. It was founded by General Motors in 1919 and remained part of the automaker's sprawling business until it split off in 2010.
This was the single biggest addition Berkshire Hathaway made to its equity portfolio in the second quarter. It's fallen around 9% since the end of June, which means you can probably scoop it up for a better price than Buffett was willing to pay a few months ago.
As you can imagine, Ally Financial originates a lot of auto loans. What you probably don't realize is that this is a very lucrative niche.
The company reported a 7.8% estimated yield from auto loans it originated in the second quarter. Rising interest rates mean Ally will have to offer slightly higher rates on checking and savings account deposits. With such a high yield on auto loans, there's still plenty of opportunity to extract a profit.
In addition to auto loans, Ally Financial has begun originating direct-to-consumer mortgages and has a credit card business that's growing by leaps and bounds. At the end of the second quarter, credit card balances shot up 93% year over year to $1.2 billion.
At the moment, Ally stock offers a 3.9% dividend yield that it will most likely bump up significantly over the next couple of years. The company only used around 20% of the $2 billion in free cash flow it generated over the past year to meet its dividend commitment. With a payout that could rise sharply over the next couple of years, this will be a relatively easy stock to hold for the long run.
