For more than a half-century, Berkshire Hathaway (BRK.A -0.45%) (BRK.B -0.28%) CEO Warren Buffett has been putting on a clinic for Wall Street. Based on annualized total returns (including dividends) since the mid-1960s, the affably named "Oracle of Omaha" has practically doubled up the benchmark S&P 500 (19.8% vs. 10.2%, as of Dec. 31, 2023).
On an aggregate total return basis, this outperformance is even more pronounced -- a roughly 36,000% total return for the S&P 500 versus a nearly 5,000,000% return for Berkshire's Class A shares (BRK.A), as of the closing bell on June 26, 2024.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett's ability to run circles around Wall Street's widely followed stock indexes is the result of a laundry list of factors that include:
- A desire to buy into businesses that have well-defined competitive advantages.
- Focusing on companies that have strong, time-tested management teams.
- Packing Berkshire Hathaway's portfolio with cyclical stocks that'll benefit from disproportionately long periods of economic growth.
- Concentrating Berkshire's 44-stock, $387 billion investment portfolio into a handful of Buffett's and his team's best ideas.
- Having plenty of cash on hand to take advantage of Wall Street's inevitable swoons.
But perhaps the most-defining characteristic of Warren Buffett's investment philosophy is his desire to own great businesses over the long term. Whereas the average stock holding period is less than a year, the Oracle of Omaha and his top investing aides, Ted Weschler and Todd Combs, are looking to hold what they deem to be wonderful businesses "indefinitely.
Though you'll find plenty of holdings in Berkshire's 44-stock portfolio that have been fixtures for years, only three stocks have been continuously owned since 2000.
Coca-Cola: Continuously held since 1988
When it comes to tenure in Berkshire Hathaway's closely watched $387 billion investment portfolio, beverage company Coca-Cola (KO -0.41%) reigns supreme. Buffett's company has been continuously holding shares of Coca-Cola since 1988 -- and with on a cost basis of $3.2475 per share is generating a dividend yield on cost of nearly 60% each year.
The great thing about consumer staples stocks like Coca-Cola is that they provide a basic necessity good or service. No matter how well or poorly the U.S. economy and/or stock market are performing, consumers still need beverages. This leads to consistent and predictable operating cash flow year after year.
On a more company-specific basis, Coca-Cola has operations in every country, save for North Korea, Cuba, and Russia (the latter has to do with its invasion of Ukraine). This virtually unparalleled geographic diversity allows the company to reap the rewards of steady operating cash flow in developed countries, while enjoying needle-moving organic growth in emerging markets. Altogether, Coke has more than two dozen brands globally that generate in excess of $1 billion in annual sales.
Branding and marketing are additional reasons Coca-Cola has been a phenomenal long-term investment. Kantar's annual "Brand Footprint" report notes that Coca-Cola has been the world's most-chosen brand off retail shelves by consumers for 12 consecutive years. The company's marketing team has been leaning on digital channels to engage its younger consumers, and can still rely on its rich history and well-known brand ambassadors to connect with its mature audience.
With Berkshire Hathaway collecting $776 million in annual dividend income from its stake in Coca-Cola, there's absolutely no incentive to sell this position.
Image source: American Express.
American Express: Continuously held since 1991
A second stock that's been a fixture in Warren Buffett's investment portfolio at Berkshire Hathaway for more than three decades is credit-services juggernaut American Express (AXP 1.38%). "AmEx," as it's better known, has been a steady holding since 1991.
AmEx is the embodiment of the prototypical Buffett investment. It's a financial stock (Buffett's favorite sector) with a well-known brand, rock-solid management team, and is cyclical.
Even though the Oracle of Omaha and Berkshire's brightest investment minds know U.S. recessions are a normal and inevitable part of the economic cycle, they realize that downturns are short-lived. Nine of the 12 U.S. recessions since the end of World War II were resolved in under 12 months. Buffett loves buying brand-name businesses like AmEx and allowing them to thrive during extended periods of economic expansion.
The not-so-subtle secret to American Express's success is that it's able to benefit from both sides of the transaction aisle. It's the clear No. 3 payment processor by credit card network purchase volume in the U.S., which allows it generate predictable fee revenue from merchants. At the same time, it's also a lender (via credit cards), which helps the company generate annual fees and net-interest income from its collective cardholders. When the U.S. and global economy are firing on all cylinders, this ability to double-dip comes in handy.
Furthermore, AmEx has historically done a magnificent job of attracting higher income individuals as cardholders. High earners are less likely to alter their spending habits or fail to pay their bills during minor economic disruptions.
Finally, Berkshire Hathaway's annual yield on cost for its stake in American Express (based on an $8.49 per share cost basis) is a jaw-dropping 33%! In other words, Berkshire is practically doubling its initial investment in AmEx based on dividend income alone every three years.
Moody's: Continuously held since its public debut on Sept. 30, 2000
The third company billionaire Warren Buffett has continuously owned since 2000 is credit-rating agency Moody's (MCO 0.36%). Berkshire Hathaway has been a shareholder since Dun & Bradstreet spun off Moody's in September 2000.
Moody's long-term outperformance is a reflection of at least one of its two core operating segments firing on all cylinders at any given time.
Moody's is best-known for its Investors Service segment, which provides credit ratings for corporate and governmental debt. More than a decade of historically low lending rates spurred businesses and governmental agencies to issue debt. This kept the fuel burning for Moody's front-and-center operating segment.
But beginning in March 2022, the Federal Reserve undertook its most-aggressive rate-hiking cycle in four decades. With interest rates climbing, the desire to raise capital via debt issuance became less appealing. As demand to rate corporate debt has slowed, growth potential has shifted to Moody's Analytics.
The company's analytics segment provides various risk management, economic assessment, and compliance solutions to its customers. In an environment where a couple of predictive tools suggest a U.S. recession is forthcoming -- e.g., the historic decline in U.S. M2 money supply -- risk-management tools are a hot commodity.
Not to sound like a broken record, but Berkshire Hathaway is raking in the dividend income with Moody's, as well. Even though new investors in Moody's stock would generate just a 0.8% yield, Berkshire's cost basis of approximately $10.05 per share produces a yield on cost of about 34%! Being able to triple Berkshire's initial investment in Moody's every third year means there's zero incentive for Warren Buffett to ditch this position.
