Even newcomers to the stock market understand that investing is ultimately a matter of trade-offs. Making bigger gains means taking bigger risks, but taking more risks also often requires more activity. Assets that are easy to passively own, conversely, generally produce weaker results. And ironically, your highest-odds/best-payoff approach isn't trying to beat the market at all, but instead just aiming to match its performance by buying and holding simple index funds.
There's a curious exception to these basic investing realities, though. That's Warren Buffett's Berkshire Hathaway (BRK.A 0.24%) (BRK.B 0.38%). Given enough time, shares of this buy-and-hold-minded conglomerate reliably outperform the S&P 500 (^GSPC 0.61%) even though they seemingly shouldn't.
Better still, it's likely to continue doing so. Buying a big enough stake in Berkshire Hathaway today, in fact, could arguably set you up for life. That's largely because Berkshire isn't quite what you might think it is.
The rest of the Berkshire Hathaway story
There's the Berkshire Hathaway you know. That's its assembly of hand-picked stocks the financial media tends to keep close tabs on in an effort to glean some sort of tip or warning. Some of the conglomerate's biggest holdings at this time still include Apple, Coca-Cola, and Chevron, although it's currently sitting on a few dozen different stocks.
Then there's the Berkshire Hathaway you may not know. That's its several dozen privately held enterprises like flooring company Shaw, Fruit of the Loom, Dairy Queen, Geico insurance, Clayton Homes, and Duracell batteries just to name a few. None of these are business capable of producing explosive growth, but they're all businesses capable of producing reliable cash flow regardless of the economic backdrop.
And that's mattered more than most investors might imagine. All told, these businesses produced operating earnings of $47.4 billion last year, adding to a cash war chest that's now worth more than $330 billion. (For perspective, Berkshire's stock portfolio is only worth about $280 billion right now, which means the market's collectively valuing all of these privately owned business at a little more than $500 billion at this time.)
You're reading that right. Nearly half of all Berkshire Hathaway's current value is made up of solid-but-small companies you can't directly invest in. In many regards, this largely makes Berkshire a business development company (or BDC) or a private equity outfit, which often boast market-beating performances.
And don't think for a minute that Warren Buffett hasn't taken full advantage of this rarely seen business structure, either.
Using these differences to its full advantage
Warren Buffett adheres to all of his own investing advice, for the record, but two of his related tips firmly apply to the discussion at hand. Those tips are "My favorite holding period is forever," and "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
How are they related? By holding a large collection of privately owned cash cows like the aforementioned Geico insurance and Duracell batteries, Berkshire is constantly generating cash. This allows Buffett and his lieutenants to -- when the time is right -- hold out those buckets rather than mere thimbles.
Simultaneously, knowing there's a bunch of cash always coming in makes it much easier for Berkshire to ride out the stock market's rough patches. In contrast with too many aggressive investors' portfolios that are often panic-liquidated at the worst possible time, Berkshire's structure allows its holdings to be true "forever" (or as long as is practically merited anyway) positions.
And we've seen the upside of this approach. Although Berkshire Hathaway stock does occasionally lag the S&P 500, it reliably catches up with and then surpasses the benchmark index's progress.
Data by YCharts.
This flexible business structure also means Warren Buffett can do what most mutual fund managers can't (even though they seemingly should). That's outperform the S&P 500.
Standard & Poor's regularly crunches the numbers. With its most recent look at the data, it reports that over the course of the past five years, 76% of large-cap mutual funds available to U.S. investors actually underperformed the S&P 500. Things don't get any better the longer back you look, either. For the past 10 years, 84% of these funds lagged the market. Since 2010, nearly 90% of these large-cap funds didn't keep up with the performance of the market's primary benchmark.
In other words, Berkshire's long-term market-beating results are not only reliable, but unusual.
The kicker: Buffett and his management team will always have the option of owning fewer or more publicly traded stocks, just as they will always have the option of holding fewer or more privately owned enterprises. And, unlike most mutual funds, Berkshire will always have the option of simply sitting on a bunch of cash when there's nothing worth buying. This flexibility is an enormous advantage.
Don't make it complicated
There will, of course, come a time when 94-year-old Buffett is no longer steering the ship at Berkshire Hathway. There's no denying at least a little bit of magic will be lost when that time comes.
Warren Buffett's absence won't change what Berkshire is and how it operates, though, nor will it prevent Buffett's wisdom from living on in the hearts and minds of Berkshire Hathaway's leadership, hopefully for generations to come.
More to the point for investors on the hunt for a perfect "forever" holding of their own, Berkshire is an ideal option. It can evolve and adapt as needed over time so you don't have to.
Bottom line? Don't make things complicated. It may not be the most exciting investment to own, but Berkshire Hathaway is one that offers excellent odds of consistently beating the market.
