Buffett’s Berkshire Hathaway is a fortress inventory in recessions

As investors go to Berkshire Hathaway AGM this weekend, they can rest easy in a stock that’s not only trading near all-time highs, but is also a safe haven in turbulent times.

Berkshire has historically outperformed the stock S&P500 in recessions and especially well in bear markets, according to data from the Bespoke Investment Group. Since 1980, Berkshire stocks have outperformed the broader market by an average of 4.41 percentage points over the course of six recessions.

The stock’s performance in bear markets is even more impressive. During the same period, the conglomerate outperformed the S&P 500 every time it fell 20%, beating the broader index by a median of 14.89 percentage points.

For Warren Buffett, that reputation isn’t accidental, but one that’s been built over many decades by a long-term focus on guiding investors through tough times and maintaining conservative investing.

“[One] The stock that has earned a solid reputation for safety is Berkshire Hathaway (BRK/A), and based on the past few decades, the award is well deserved,” read a tailored note earlier this week.

Long term focus

Known for its value investing style, the Oracle of Omaha favors long-term exposure to companies that have strong fundamentals and are likely to experience future growth.

Among its notable winners over the years is Applewhich he started buying in 2016 and which has been compared to his legendary investment Coke. The iPhone maker has outperformed throughout the bear market, giving Berkshire a similar outperformance, as Apple accounts for about 45% of the company’s portfolio, according to CNBC’s Berkshire Hathaway Portfolio Tracker. It’s also about a quarter of Berkshire’s market cap. Apple shares are up 27% this year.

“Like Apple, so does much of Berkshire,” said Paul Hickey of Bespoke.

That’s helped Berkshire Hathaway’s Class A shares soar more than 4% this year. That’s slightly below the S&P 500, but the stock is still trading near the 52-week highs it hit just this week. It hit $506,000 per share on Monday. Last year, the threshold of half a million dollars was exceeded for the first time.

For Berkshire shareholders attending this year’s conference, the stock performance proves the value of holding shares for the long term.

“The vast majority of people who show up here are over 60 years old. They’re the ones who got rich from owning Berkshire Hathaway,” said Bill Smead, founder and chairman of Smead Capital Management and a shareholder of Berkshire. “People thought Berkshire Hathaway was a mistake and they got that advantage.”

However, his bets have not always paid off. The billionaire investor notoriously sold all of its airline stocks at the start of the Covid-19 pandemic, resulting in a loss on its investment.

A conservative attitude

Buffett has also maintained a conservative stance. While this has caused it to underperform at times during bull markets, it is what has helped the investor outperform the market during periods of volatility.

Part of it has to do with his vast cash stash. While Buffett’s operating profits declined in the fourth quarter of 2022, his cash allocation increased to $128.651 billion, up from about $109 billion in the third quarter. In fact, Buffett said Berkshire will continue to hold a “boatload” of cash and U.S. Treasury bills.

“We will also avoid behaviors that could result in inconvenient cash needs at inopportune times, including financial panics and unprecedented insurance losses,” Buffett wrote in his annual letter to shareholders. “And yes, our shareholders will continue to save and thrive by retaining profits. There will be no finish line at Berkshire.”

This also has to do with his longstanding affection for insurance companies. The well-run companies constantly review their risks to stay profitable and are huge cash generators.

He first bought property-casualty insurer National Indemnity more than half a century ago, which helped generate cash for Berkshire’s future ventures. Last year, he bought insurance company Alleghany in a $11.6 billion deal, a deal that was Buffett’s largest since 2016.

In the past, Buffett has called investing “the easy game,” and that’s proven throughout his career. Berkshire posted a compound annual gain of 19.8% from 1965 through 2022, compared to 9.9% for the S&P 500 over the same period.

“Buffett has developed a habit of going against the crowd throughout his career and it has served him well,” said Bespoke’s Hickey. “It’s something that most investors say they enjoy doing, but in practice it’s a lot harder to do.”

— CNBC’s Yun Li contributed to this report

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