The market’s recovery in the past 11 months or more was simply remarkable. Since rock bottom in late March, after the COVID-19 pandemic devastated the US economy, the S&P 500 increased by 75%. The Nasdaq, which has a lot of technology, fared even better, with the Nasdaq Composite index more than doubling since the lows.
This performance left many investors concerned that the market might be a little overheated and that we could suffer a correction or crash. But I’m not. While we can certainly see a drop in the market, long-term investors should welcome the drops as opportunities to buy great deals at a discount. With actions like Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) forming the backbone of my portfolio, I have absolutely no concern about the long-term direction of my equity.
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Berkshire Hathaway in a nutshell
Most investors know Berkshire Hathaway as the company that enriched Warren Buffett, but many are unsure of what Berkshire does. The answer is that Berkshire itself does not do much; is a holding company.
Berkshire has more than 60 subsidiaries in various sectors. Some well-known brands that are part of the Berkshire Hathaway universe include auto insurance giant GEICO, Brooks sneakers, Duracell batteries, Fruit of the Loom clothing, Dairy Queen and Pampered Chef, to name a few.
In addition, Berkshire had a huge portfolio of shares worth about $ 277 billion at the time of this writing. About $ 117 billion of that is in the form of Apple (NASDAQ: AAPL) stocks, but there are dozens of different stock positions in a variety of sectors.
Last, but certainly not least, Berkshire prefers to keep a ton of cash available to take advantage of opportunities to acquire more companies and buy more shares. In fact, the word “ton” 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 all the right ways
Clearly, Berkshire Hathaway’s business is not as exciting as some of the big tech companies that are catching most of the headlines today. Berkshire will never quadruple in less than a year. Enlargement (NASDAQ: ZM) has, nor will it be referred to as a revolutionary innovator, as Tesla (NASDAQ: TSLA). But everything is fine. Berkshire is certainly boring compared to many of today’s popular stocks, but it is boring in the right way for long-term investors.
The main conclusion is that most of Berkshire’s businesses, as well as investments in its stock portfolio, were selected for their resilience. Consider Berkshire’s major subsidiaries, such as GEICO, Duracell, BNSF Railway and Berkshire Hathaway Energy. They all sell products or services that people need, even if the economy is in a bad state. The same can be said for many of Berkshire’s major equity investments, such as Bank of America (NYSE: BAC), Coke (NYSE: KO), and Verizon (NYSE: VZ). There will always be a demand for safe places to store money, food and drinks, and reliable ways to stay connected.
Not only that, but Berkshire’s huge cash stock also allows the company to take advantage of difficult savings and put money to work while investments are cheap. For example, the company’s investment in Bank of America originated in the wake of the financial crisis, when few companies had billions in cash just sitting around.
How does Berkshire really behave in difficult times?
So far, we’ve seen that Berkshire should theoretically perform very well, no matter what the stock market or the economy is doing. But the proof is in Berkshire’s 56-year history. Since 1965, the first year that Buffett ran the show, the S&P 500 has generated negative total returns 12 times. Berkshire outperformed S&P in all but two of those years, and often by a very wide margin. Sure, Berkshire’s strong performance in times of prosperity was certainly the main factor in its massive superior performance over time, but the company’s ability to beat the market handily during the bad years was almost as important.