When Warren Buffett speaks, Wall Street and investors tend to pay close attention. That's because the Oracle of Omaha has led Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) Class A Shares (BRK.A) to an aggregate return of 4,242,338%, through the closing bell on July 12, 2023, since becoming CEO in the mid-1960s. It's precisely why attendance at Berkshire Hathaway's annual shareholder meetings grew from a few dozen people in 1973 to well over 30,000 shareholders and investors this year.
What's particularly noteworthy about Warren Buffett is that he's not afraid to share what factors he looks for in long-term investments.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
What does Warren Buffett look for in a long-term investment?
For instance, the Oracle of Omaha prefers putting Berkshire Hathaway's money to work in businesses that have well-defined, sustainable competitive advantages. Tech stock Apple (AAPL -0.35%), which Buffett referred to as "a better business than any we own" during the latest annual shareholder meeting, is the ideal example of a company with a sustained moat.
Although Apple faces plenty of competition from smartphone developers, it's been riding its first-mover advantages in the smartphone market for well over a decade. Since introducing a 5G-capable version of the iPhone in the fourth quarter of 2020, Apple has consistently accounted for around 50% (if not more) of U.S. domestic smartphone share.
The Oracle of Omaha also appreciates businesses with top-notch capital-return programs. Apple has repurchased approximately $586 billion worth of its common stock over the trailing decade. Meanwhile, energy stock Chevron (CVX 0.37%) has raised its base annual dividend for 36 consecutive years, and its board recently OK'd an up to $75 billion share repurchase program. Buffett is a huge fan of buyback programs that reduce a company's outstanding share count which, over time, gives existing shareholders a larger stake in the business.
Additionally, Warren Buffett gravitates to cyclical sectors, industries, and companies. Cyclical stocks ebb and flow with the overall health of the U.S. or global economy. Buffett and his investing team realize that recessions are a normal and inevitable part of the long-term economic cycle. Rather than foolishly trying to time when these downturns will occur, he and his team have packed Berkshire's portfolio and owned assets with cyclical businesses that can take advantage of periods of expansion, which statistically last a lot longer than recessions.
Lastly, Warren Buffett favors portfolio concentration. Even though the Oracle of Omaha and his investing lieutenants, Ted Weschler and Todd Combs, are overseeing more than 50 securities in Berkshire Hathaway's portfolio at the moment, just over a dozen holdings account for 90% of the company's $372 billion investment portfolio. In other words, Warren Buffett strongly believes in putting an outsized amount of capital to work in his perceived-to-be "best" ideas.
Image source: Getty Images.
These two Warren Buffett holdings have never failed investors -- but there's a catch
Riding Warren Buffett's coattails has been a moneymaking strategy for new and tenured investors alike for decades.
But not all of Warren Buffett's holdings are created equally. Two of Berkshire Hathaway's investments have been flawless moneymakers since the start of 1900 -- but come with a catch. These two investments in question being the SPDR S&P 500 ETF Trust (SPY 0.95%) and the Vanguard S&P 500 ETF (VOO 1.00%). Both of these exchange-traded funds (ETFs) attempt to mirror the performance of the benchmark S&P 500 (^GSPC 1.02%).
Every year, market analytics company Crestmont Research refreshes its dataset of what a hypothetical investor would have generated in total returns, including dividends, if they'd purchased an S&P 500 tracking index and held that position for 20 years.
The interesting thing about this dataset is that Crestmont was able to back-test its rolling 20-year total return data to 1900. Some of you might be scratching your head given that the S&P didn't come into existence until 1923, and didn't contain 500 components until 1957. However, since other major stock indexes contained similar components, Crestmont was able to trace these hypothetical returns all the way back to 1900, providing it with 104 rolling 20-year periods of total return data (1919-2022).
Crestmont's dataset showed that all 104 ending years produced a positive total return. In other words, if an investor had hypothetically purchased an S&P 500 tracking index at any point since the beginning of 1900 and (key point!) held that position for 20 years (this is the aforementioned catch), they made money every single time.
Wall Street doesn't offer much in the way of guarantees, which is what makes a 104 out of 104 performance all the more impressive. It's also why the Oracle of Omaha strongly suggests everyday investors buy index funds, such as the SPDR S&P 500 ETF Trust or Vanguard S&P 500 ETF, to grow their wealth.
While it's true that neither the S&P 500 ETF Trust nor Vanguard S&P 500 ETF have been around since the beginning of 1900, the index they mirror has a flawless track record of making patient investors money for more than a century. If history continues to repeat itself, investors willing to buy and hold these ETFs for 20 years (or longer) should have no trouble building wealth on Wall Street.
