The market rebound over the past 11 months has been simply remarkable. Since bottoming out in late March after the COVID-19 pandemic wreaked havoc on the U.S. economy, the S&P 500 is up 75%. The tech-heavy Nasdaq fared even better, with a Nasdaq Composite index more than doubling from its lows.
This performance has worried many investors that the market could be a little overheated and that we could be in for a correction or a crash. But I am not. While we could certainly see a decline in the market, long-term investors should welcome declines as opportunities to buy excellent companies at a discount. With stocks such as Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) As the backbone of my portfolio, I have absolutely no concerns about the long-term direction of my net worth.
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Berkshire Hathaway in a nutshell
Most investors know Berkshire Hathaway as the company that made Warren Buffett rich, but many are not sure what Berkshire does. The answer is that Berkshire itself doesn’t do much; it is a holding company.
Berkshire has more than 60 subsidiaries in various industries. Some well-known brands that are part of the Berkshire Hathaway universe include auto insurance giant GEICO, Brooks running shoes, Duracell batteries, Fruit of the Loom apparel, Dairy Queen, and Pampered Chef, just to name a few.
Additionally, at the time of writing, Berkshire has a massive equity portfolio worth approximately $ 277 billion. About $ 117 billion of this is in the form of Apple (NASDAQ: AAPL) stock, but there are dozens of different stock positions in different industries.
Last but certainly not least, Berkshire prefers to keep a lot of cash on hand to take advantage of opportunities to acquire more companies and buy more stock. In fact, the word “tons” probably doesn’t do it justice. At the end of the third quarter, Berkshire had more than $ 145 billion in cash and cash equivalents on its balance sheet.
Boring in the right way
Obviously, the Berkshire Hathaway companies are not as exciting as some of the big tech companies that are making the most headlines today. Berkshire will never quadruple in less than a year Zoom (NASDAQ: ZM) has nor will it be referred to as a breakthrough innovator like Tesla (NASDAQ: TSLA)But that’s okay. Berkshire is certainly boring compared to many of the current popular stocks, but it is boring in the right way for long-term investors.
The main trade-off is that most of Berkshire’s companies, as well as its equity portfolio investments, were selected for their resilience. Consider major Berkshire subsidiaries such as GEICO, Duracell, BNSF Railway, and Berkshire Hathaway Energy. They all sell products or services that people need, even when the economy is in bad shape. The same can be said for many of Berkshire’s top equity investments, such as bank of America (NYSE: BAC) Coca Cola (NYSE: KO), and Verizon (NYSE: VZ)There will always be a demand for safe places to keep money, food and drink, and reliable ways to stay connected.
Not only that, but Berkshire’s massive cash supply also allows the company to take advantage of difficult economies and put money to work while investments are cheap. For example, its investment in the company’s Bank of America originated in the wake of the financial crisis, when few companies had billions in cash.
How is Berkshire actually faring in tough times?
So far we’ve seen that Berkshire should theoretically perform quite well no matter what the stock market or economy is doing. But the proof is in Berkshire’s 56-year track record. Since 1965, Buffett’s first year of running the show, the S&P 500 has generated negative total returns 12 times. Berkshire outperformed the S&P in all but two years, and often by a fairly wide margin. Sure, Berkshire’s strong performance in prosperous times has certainly been the most important factor in its massive outperformance over time, but the company’s ability to handily beat the market during bad years was almost as important.