Over the past few years, many younger investors have shifted toward riskier meme stocks, cryptocurrencies, leveraged exchange-traded funds (ETFs), and options to chase bigger gains. That trend can be attributed to the rise of commission-free trading platforms, social media buzz, and "financial nihilism" curbing the appeal of longer-term investments.
Investors who adopt those short-sighted strategies might outperform the market with a few lucky bets, but it's notoriously difficult to maintain that winning streak over the long term. So instead of chasing those riskier plays, I believe younger investors should take a closer look at one leading financial stock that has soundly beat the market for decades: Berkshire Hathaway (BRK.A -0.51%) (BRK.B -0.24%).
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How easily did Berkshire Hathaway beat the market?
Back in 1965, Warren Buffett's fund took over the struggling textile maker Berkshire Hathaway. Berkshire then divested its core textile business and acquired cash-rich insurance, railroad, energy, and consumer staples companies. It reinvested that cash into a massive portfolio filled with dozens of blue chip stocks.
At the end of 1965, a single share of Berkshire's Class A stock was only worth $12. Today, it trades at $744,405 -- so a $1,000 investment would be worth $62.03 million today. The same investment in the S&P 500 would only have grown to $73,400.
From 1965 to 2024, Berkshire's net earnings surged from just $2.2 million to $88.99 billion.
At the end of 1980, it started to disclose its "operating earnings" -- which exclude the volatile gains and losses from its investment portfolio -- as the main yardstick of its profitability. From 1980 to 2024, its operating earnings skyrocketed from $42 million to $47.44 billion.
How did Berkshire Hathaway maintain its momentum?
Under Buffett, Berkshire's growth was initially driven by its acquisitions of big insurance companies like National Indemnity, GEICO, and General Re. These insurers generate a lot of cash by collecting recurring premiums, and Berkshire plows a lot of that cash into its other subsidiaries and the expansion of its closely watched stock portfolio.
From 1980 to 2024, its "float" -- the amount of cash from its insurance premiums that can be deployed on investments before the claims need to be paid -- rose from $237 million to $171 billion. Its cash and equivalents swelled from $237 million to $189 billion. Today, its investment portfolio -- which holds dozens of blue chip stocks like Apple, American Express, Bank of America, and Coca-Cola -- is worth $307 billion. That's 29% of its market cap of $1.07 trillion.
Berkshire still generates about half of its operating earnings from its insurance subsidiaries, which are better insulated from economic downturns than other sectors because most individuals and businesses won't cancel their insurance plans just to save a few dollars. That stability usually offsets the macro headwinds for its other more cyclical subsidiaries.
But can Berkshire keep beating the market?
Berkshire has been a great market-beating investment over the past six decades, but Warren Buffett will step down as CEO by the end of this year and hand the reins over the Greg Abel, the current CEO of Berkshire Energy. Buffett's retirement isn't surprising, but it rattled a lot of investors who had relied on his leadership and stock-picking skills.
But as I discussed in previous articles, Berkshire should maintain its current growth trajectory as long as Abel sticks to Buffett's playbook. As long as he nurtures Berkshire's cash-rich core businesses, wisely reinvests its float into other evergreen businesses, and doesn't "di-worsify" its business through hasty acquisitions, it should continue to expand.
Why should younger investors pay attention to Berkshire?
Berkshire Hathaway probably won't replicate its life-changing returns from the past six decades. It also probably won't generate bigger short-term gains than the market's hottest meme stocks or cryptocurrencies. But over the long term, its diversification, scale, and massive cash hoard should make it a safe stock for younger investors to buy, hold, and simply forget. So instead of placing myopic bets on volatile plays, it might be smarter to simply stick with this blue chip stalwart.
