In 2024, Americans are set to get an average tax refund of $1,741, according to the Internal Revenue Service. If you're one of the lucky ones who doesn't need to use that money to pay off credit card debt, one smart way to use that money is to build up your stock portfolio.
That said, it's also important to bear in mind that you shouldn't buy stocks without understanding that this type of investing requires a minimum of a five-year horizon. If you know you're going to need that money in less than five years, it's arguably better to consider a safer and more tax-friendly vehicle like a certificate of deposit or a money market account.
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Which stocks could make the most of your tax refund without taking on an undue amount of risk? One stock that fits the bill is Warren Buffett's diversified holding company Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%). Read on to find out more about this incredible blue-chip stock and why it deserves a spot in your portfolio.
A proven wealth creator
Berkshire Hathaway, led by super investor Warren Buffett, is a diversified holding company with a proven track record of wealth creation. Its value-focused investing strategy centers around buying high-quality companies at a discount, which has paid off handsomely for the company's long-term shareholders.
Since Buffett took over as CEO in 1965, Berkshire's stock has outperformed the benchmark S&P 500 index (including dividends) by a factor of 153 times. This remarkable performance is especially impressive considering that almost no one consistently beats the S&P 500 over a period longer than five years, much less trounces it over a 58-year stretch and counting.
Why is Berkshire stock still a great buy? Apart from investing alongside one of the best business pickers in history, the company's portfolio is largely geared toward capital preservation. In today's growth-oriented market, where fundamentals sometimes take a back seat, capital preservation may not be particularly enticing. However, there are good reasons to consider buying Berkshire stock right now. Three of the most compelling reasons are:
1. Market Valuation: The broader market has become exceptionally pricey, as evidenced by its elevated cyclically adjusted price-to-earnings ratio (CAPE). Specifically, the S&P 500 is trading at almost twice its historical average CAPE ratio, implying that a sizable downside correction may be in the cards later this year or early next year. After all, trends like artificial intelligence and weight loss drugs will eventually lose steam, and fundamentals will matter once again.
2. Cash Reserves: Berkshire's massive cash pile is roughly equivalent to the market capitalization ($154 billion) of the major drug manufacturer Pfizer right now. It thus has plenty of financial firepower to take advantage of bargains as they become available and any irrational market dynamics.
3. Historical Consistency: Berkshire stock is highly unlikely to lose you money over the next five years. The company has never had five consecutive years of negative shareholder returns in its history, and with a fundamentally strong balance sheet, there's no reason to think it will start consistently losing money for shareholders anytime soon.
Key takeaway
In all, Berkshire Hathaway's long-term success, disciplined investment approach, and focus on capital preservation make it an attractive choice for investors looking for stability and reliable growth in their portfolios. So, if you're looking for a stock to buy with your tax refund and you simply can't afford to lose money, Berkshire is arguably one of the best investments you can make right now.
