Warren Buffett is widely considered one of the greatest investors of all time, and he has the track record to back it up.
Since he took control of Berkshire Hathaway (BRK.A +0.01%) (BRK.B 0.24%) in 1965, it has produced compound annual growth of 19.8%. The S&P 500, by comparison, has generated an average annualized return of 10.2% over the same period. That's a huge gap that has compounded massively over the decades, and Buffett openly shares how he does it with every quarterly and annual report.
Buffett follows a simple philosophy he attributes to his late Vice Chairman Charlie Munger: He aims to buy wonderful businesses at fair prices. When he can't (or doesn't want to) buy the whole company, he'll buy an equity stake. Berkshire's stock portfolio is currently worth about $377 billion.
There are dozens of great stocks in Berkshire's portfolio, and many of them have produced spectacular gains for the company and its investors. However, Buffett's favorite stock to buy for Berkshire shareholders has already doubled since (after a pause) he began buying shares of it again in 2018. He's bought even more since then, and he still sees upside in this stock today.
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Buffett's biggest stock purchase over the past six years
Since 2018, Buffett has spent approximately $78.5 billion buying shares of Berkshire Hathaway. That's right -- his biggest stock purchases in recent years have been of his own company's stock. Not a single quarter has gone by since mid-2018 where he didn't reduce the conglomerate's outstanding share count.
The Berkshire board approved a major change to its share repurchase authorization strategy that year. Previously, the rule had been that the shares had to be trading below a specified price-to-book ratio (1.2) in order for the company to be allowed to engage in buybacks. The new rule allowed Buffett to buy back shares of Berkshire as long as he (and Charlie Munger, at the time) believed the shares were trading below their intrinsic value. He hasn't missed an opportunity to buy back shares since.
That said, he isn't robotically repurchasing shares without regard to their price. As with all of his moves in Berkshire's equity portfolio or its growing empire of wholly owned businesses, Buffett's purchases are price dependent. "What is sensible at a discount to business-value becomes stupid if done at a premium," he noted in his most recent letter to shareholders.
NYSE: BRK.B
Key Data Points
Buffett aims to grow the wealth of all Berkshire shareholders. Buying shares of an overpriced stock, even Berkshire itself, is wealth-destroying. Imagine buying a house for 10% more than its market value. Your net worth would take a significant hit because you had overpaid for that asset. The same is true when buying -- or buying back -- stock.
So far, he's done extremely well by shareholders. Berkshire Hathaway currently trades near its all-time high. Since the first share repurchase under the new plan on Aug. 7, 2018, the share price is up by more than 96% and up about 98% from his average purchase price that quarter.
Buffett has consistently returned cash to shareholders through buybacks each quarter since, but he's been opportunistic with his repurchase activity. In 2020 and 2021, he stepped up the amount of cash he put toward buybacks. That worked out well as Berkshire stock trailed the S&P 500 in its recovery from the 2020 bear market, but it has outperformed from 2022 onward.
Buffett still thinks there's room to outperform
Buffett believes Berkshire Hathaway, with its current portfolio of businesses and equity positions, is well positioned to keep outperforming the average American business over the long run.
The biggest positions in Berkshire's portfolio, including Apple, Bank of America, and American Express, all still look like great stocks to buy. The conglomerate's core operations have seen strong growth in operating profits over the past few years. They reached $37.4 billion last year, up 50% from 2018.
That said, those core operations are producing more cash than he has been able to find compelling ways to deploy, either in business acquisitions or stock purchases. As a result, the amount of cash on Berkshire's balance sheet ballooned to $189 billion as of the end of Q1, and Buffett expects it to exceed $200 billion this quarter. While the company is collecting a nice amount of interest on that cash by investing it in U.S. Treasuries, it could do better if placed in a suitable investment. As such, it's a drag on Berkshire's returns in the near term.
In the long run, however, that massive cash position could unlock opportunities the next time the market goes haywire, as it tends to do every decade or so. "Berkshire's ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity," Buffett wrote to shareholders in February.
With Berkshire Hathaway shares currently trading at a forward P/E ratio of 18.6, the stock looks undervalued. When you consider the amount of cash on the conglomerate's balance sheet and Buffett's ongoing share repurchases, it looks even more attractive. Long-term investors may want to join him in buying shares.
