For nearly 60 years, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been putting on a clinic for Wall Street and everyday investors. Since becoming Berkshire's leader in the mid-1960s, he's overseen a phenomenal 4,700,010% aggregate return in his company's Class A shares (BRK.A), as of the closing bell on Feb. 1, 2024.
What's great about the Oracle of Omaha's tenure as CEO is there are few secrets. Though he's not going to divulge what he and his investment team are buying ahead of time, he's proven more than willing to share his investment philosophy and thoughts on the U.S. economy over the years. In particular, Buffett is a big fan of buying stakes in brand-name businesses with sustainable competitive edges.
Even factoring in down years, Buffett and his investing aides have led Berkshire Hathaway to a nearly 20% annualized return over roughly six decades. That's nearly double the annualized total return, including dividends, of the benchmark S&P 500.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Berkshire Hathaway is making its case to join a very prestigious group of companies
More importantly, Warren Buffett's Berkshire Hathaway is closing in on history. As of the closing bell on Feb. 1, it was less than $162 billion in market cap away from joining a very select group of publicly traded companies to have reached the $1 trillion valuation mark. This club currently includes:
- Microsoft: $3 trillion
- Apple (AAPL -0.35%): $2.89 trillion
- Alphabet: $1.77 trillion (Class A shares, GOOGL)
- Amazon: $1.65 trillion
- Meta Platforms: $1.01 trillion
Electric-vehicle manufacturer Tesla also previously joined the trillion-dollar ranks, but has lost more than 50% of its value since reaching an all-time high. That's just six publicly traded companies out of thousands of major exchange-listed businesses that have reached the trillion-dollar plateau. Berkshire finds itself less than a 20% gain away from becoming lucky No. 7.
A big reason Berkshire Hathaway continues to outperform most years is its highly concentrated investment portfolio. Despite having stakes in around 50 stocks, Buffett and his team strongly believe in putting an outsized percentage of their capital to work in their best investment ideas. Many of these top ideas have outperformed the broader market.
For instance, Apple accounts for a 46% share of Berkshire's $372 billion investment portfolio, as of February 1. Buffett and his investing team have put in the neighborhood of $36.3 billion to work in shares of Apple since the first quarter of 2016. This sizable bet on Apple has resulted in an unrealized gain of almost $135 billion. Betting on Apple's incredibly strong brand, as well as its leading innovation via the iPhone and its burgeoning Services segment, has proved to be an incredibly smart move.
Another catalyst for Berkshire's ongoing success is that its investment portfolio and the roughly five dozen businesses it's acquired over the years -- this includes famous insurer GEICO and prominent railroad BNSF -- are primarily cyclical. In other words, they tend to ebb and flow with the health of the U.S. economy.
Warren Buffett and his late right-hand man Charlie Munger learned a long time ago that it's a fool's errand to attempt to guess when downturns will occur in the U.S. economy and stock market. Rather, they positioned Berkshire's investment portfolio and the company's owned assets to take advantage of long-winded periods of expansion. Since recessions are historically short-lived, patience has allowed Berkshire Hathaway to thrive.
To add to the above, Buffett's company tends to hang onto its largest investments for a long time. For instance, Coca-Cola and American Express have been continuous holdings since 1988 and 1991, respectively. You could argue that doing nothing was the best decision Warren Buffett and his team ever made.
Image source: Apple.
A rotten Apple could spoil the bunch (at least in 2024)
But in spite of more than a half-century of outperformance and an investment portfolio that's intricately pinned to the health of the U.S. economy, I'm not convinced that 2024 is the year we'll see Berkshire Hathaway join this exclusive club.
One potential hurdle for Berkshire Hathaway's stock is the possibility of a U.S. recession taking place. Although economic data points are strong at the moment, a couple of predictive indicators and money-based metrics tell a different story. Specifically, the first decline in M2 money supply since the Great Depression, coupled with an assortment of recession-predicting tools, suggest an economic downturn is likely.
Considering how cyclical most of Berkshire's investments and owned assets are, Buffett's company is prone to weakness during short-lived periods of contraction.
However, the biggest threat to Berkshire Hathaway gaining a tad over 27% during 2024 and joining the exclusive trillion-dollar club is a rotten Apple.
Everything I noted earlier about Apple is true. It's been a leader in smartphone market share in the U.S. for more than a decade and has seen strong sales growth from its Services segment as CEO Tim Cook emphasizes high-margin subscription services. There's little question that Apple is going to remain profitable.
However, Apple's outsized returns have historically come on the heels of strong growth (think high-single-digit or low-double-digit annual sales increases). In fiscal 2023 (ended Sept. 30, 2023), Apple's year-over-year revenue fell by nearly 3%. During the fiscal first quarter of 2024 (ended Dec. 30), revenue growth totaled just 2%. Even with above-average inflation as a tailwind, muted demand for its physical products, along with weaker sales in China, have heavily weighed on its operating performance.
Though Berkshire Hathaway can fall back on its roughly five dozen wholly owned assets that have steadily increased the company's operating income over time, overcoming a poor year from an investment that accounts for close to half of the company's invested assets could be too big of a pill to swallow.
I have no doubts that Warren Buffett's Berkshire Hathaway will eventually join elite company and become a trillion-dollar business. But I fully expect a single rotten Apple to spoil the dream -- at least in 2024.
