Berkshire Hathaway: A True No-Brainer

Broadcast #1,057

How many times have you heard that the last 10 years were the “lost decade” for U.S. stock investors?

It’s not hard to see why. Ten years ago, the S&P 500 was just under 1,400. Today it’s just under 1,400.

Sure, an S&P investor picked up some dividends along the way. But after the rip-roaring 80s and 90s, the broad market’s performance was an enormous disappointment for most investors.

However, 30 days ago we touched the 10-year anniversary of our recommendation of Berkshire Hathaway (NYSE: BRK-B) in The Oxford All-Star Portfolio. Our shares are currently up 94%.

Don’t get me wrong. A 94% return over 10 years isn’t ordinarily a reason to open the good champagne. But let’s put things in perspective. This was one of the worst decades for large-cap stocks in history. And our decision to go with Warren Buffett – the world’s best long-term investor – was hardly a stroke of genius. Yet that’s exactly what confounds me. So many investors fail to opt for the simplest advantages.

Most investors dream of investing like Warren Buffett. Publishers know this. Hundreds of books have been written purporting to show you how to buy stocks like the Oracle of Omaha.

I hate to be the skunk at the garden party, but you’ll never invest like Warren Buffett. The man’s a financial genius who’s forgotten more about how to evaluate a business than most analysts will ever learn.

More importantly, you don’t have to invest like Buffett. You’ve always had the option of investing with him instead. And that’s just what we did.

On Saturday, Buffett released the Berkshire 2010 annual report, essential reading for serious investors. (To read the full report, click here.)

Last year, Berkshire’s net earnings jumped 61% to $13 billion. The firm’s book value – Buffett’s preferred yardstick of success – grew 13%. Buffett has outperformed the S&P 500 for 38 of the 46 years he’s run the company. And he remains optimistic about the future.

That’s a good thing because when you own a share of Berkshire Hathaway, you have a stake in dozens of leading companies, including GEICO, Benjamin Moore, Dairy Queen, Fruit of the Loom, MidAmerican Energy, See’s Candies, ConocoPhillips, American Express, Burlington Northern Santa Fe, Costco, General Electric, Johnson & Johnson, Kraft Foods, Nike, Proctor & Gamble, Wal-Mart, Washington Post and others.

In his new report, Buffett goes out of his way to explain how Berkshire’s book value severely understates the intrinsic value of the company. But he also conceded that the company’s best years are behind it now.

Why? Because – as I explain at virtually every conference I speak – huge companies simply cannot grow at the phenomenal rate that they did when they were fillies. (That’s why our portfolios are chock full of small- and mid-cap stocks.)

As Buffett cautions shareholders in his letter, “The bountiful years, I want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance.”

That doesn’t mean Berkshire Hathaway shouldn’t have a place in your portfolio. Buffett’s been saying this now for the last 15 years. The stock is a conservative investment, but one that’s still likely to generate meaningful, after-tax returns. (Berkshire makes no taxable distributions.)

In short, should the world’s most successful investor still manage a portion of your equity portfolio?

Absolutely. It’s a true no-brainer.

Alexander Green