Warren Buffett's illustrious career as an investor began at age 11. He has succeeded through multiple stock market cycles, economic crashes, presidents, and even geopolitical conflicts.
Buffett was around when car giant General Motors became the world's first $10 billion company in 1955. He also watched industrial conglomerate General Electric amass a $100 billion market capitalization in 1995 -- the first ever company to do so.
And when Apple (AAPL -0.35%) became the world's first $1 trillion company in 2018, he had a front-row seat because his Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) investment company is one of the tech giant's largest investors.
Apple has since been joined by Microsoft, Amazon, and Google parent Alphabet in the $1 trillion club.
But there might be one more member of that exclusive circle in the future. Buffett's very own Berkshire Hathaway is on a clearer trajectory toward a $1 trillion valuation than almost any company in the market today, and here's why.
Image source: The Motley Fool.
It all started in 1965
Berkshire Hathaway was formed in 1929 and operated in the textiles industry. But it was going through a difficult time in 1965, when Buffett stepped in to acquire a controlling stake for $8.3 million. Since taking over, he has transformed it into a holding company that now owns 52 different stock securities spanning the banking, energy, consumer discretionary, media, and technology sectors.
Berkshire's total portfolio is worth $343 billion, including $128 billion in cash and equivalents that it's ready to deploy when the next attractive opportunity comes along.
The company's incredible run of success in Buffett's 58 years at the helm stems from a relatively simple set of principles.
He tends only to invest in businesses he understands. He also prefers those generating a profit (as opposed to high-growth companies reporting losses), and that's especially true if they have a strong balance sheet. A company also gets a tick of approval if it's returning money to shareholders through dividends and share repurchases.
However, Buffett's most important weapon is time. When he buys a stock for Berkshire, his intention is to hold it for decades, if not forever. Berkshire's portfolio offers plenty of examples; it has owned shares in Coca-Cola since 1988, American Express since 1998, and Procter & Gamble since 2005 -- though he acquired those shares when Procter bought razor maker Gillette, which Buffett owned since 1989.
Buffett preaches diversification, but Berkshire's portfolio is highly concentrated
In 2007, Buffett famously made a $1 million bet with asset management firm Protege Partners that index funds would outperform a basket of hedge funds over a 10-year period. Index funds are diversified and use buy-and-hold strategies, which Buffett likes. Hedge funds are actively managed, meaning they try to beat the broader market by focusing on a narrow set of investment ideas.
Buffett won convincingly. The Vanguard 500 Index Fund Admiral Shares, which he selected, returned 7.1% compounded annually over the course of the wager, whereas the basket of hedge funds selected by Protege Partners averaged just 2.2%.
But while Berkshire appears to be diversified, given it owns 52 securities, the value of its portfolio is actually concentrated in just a handful of stocks. In fact, its position in Apple stock alone makes up 44% of the portfolio's value.
Berkshire bought its first share of Apple in 2016 and it was also a net buyer in 2017, 2018, and 2022. Not only has Apple surpassed a $1 trillion valuation since that initial purchase, but it's now the world's largest company with a $2.6 trillion market capitalization. Berkshire's current position amounts to 5.8% of the tech giant's outstanding shares, worth $151 billion.
Apple has all the attributes of a Buffett stock. In fiscal 2022 (ended Sept. 24), Apple generated $99.8 billion in net income. It returned $14.8 billion to shareholders through dividends, and another $89.4 billion through share buybacks during that year. The company's brand has stood the test of time, and many consumers would consider products like the iPhone smartphone as essential.
Berkshire is on track to reach a $1 trillion valuation within two years
Between 1965 and 2022, Berkshire Hathaway's Class A stock has grown in value at a compound annual rate of 19.8%. That's twice the 9.9% annual return of the benchmark S&P 500 stock market index over the same period, but thanks to the effects of compounding, Berkshire's outperformance is completely mind-blowing in dollar terms.
A $1,000 investment in the S&P 500 index in 1965 would've been worth $247,080 at the end of 2022. But $1,000 invested in Berkshire stock in 1965 would've grown into a whopping $39.8 million over the same period!
Few other public companies have achieved such a staggering return, so it's little wonder Berkshire has been an active investor in its own stock. As my Motley Fool colleague Sean Williams points out, the company has repurchased $66 billion worth of its shares in the past five years alone.
Berkshire is currently valued at $716 billion, which is within sight of the $1 trillion mark. If its stock continues to average an annual return of 19.8%, it will surpass the exclusive milestone within the next two years. But even if it doesn't get there within that time frame, it appears inevitable it will over the long run.
