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The stock market has been very volatile for the past six months or so, and many investors are uncertain about investing right now, given that all the major indexes are in negative territory year to date. Robinhood, a brokerage firm that caters to new, younger, and less affluent investors, has seen the number of active users drop significantly over the past few quarters. That indicates that many investors, especially those who are newer to investing, are sitting on the sidelines.
Inflation and the potential for an economic slowdown are contributing to the uncertainty. In times like this, large, stable companies with long-term track records of earnings through various market cycles are a good place to invest — like Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). The holding company run by Warren Buffett is up over 9% year to date and has been one of the steadiest, most reliable stocks on the market over the years. It does come with a high share price, but investors can get it for the cost of a penny stock through fractional shares investing.
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Beating the market
Pretty much every investor knows Berkshire Hathaway and its legendary chairman and CEO, Buffett, who is often called the Oracle of Omaha. But not everyone knows what Berkshire Hathaway does — or what it owns. The company owns several businesses, including GEICO, Duracell, Dairy Queen, and Fruit of the Loom, to name a few.
Berkshire Hathaway also has a massive stock portfolio worth more than $300 billion, which includes investments in almost 50 public companies, including Apple, Bank of America, American Express, Coca-Cola, and Kraft Heinz — the five largest holdings. It also has well over $100 billion sitting in cash.
Buffett is considered one of the world’s greatest investors. A big part of his investment philosophy is focused on finding value — stocks and investments that are priced below their intrinsic value. But he also looks for companies with strong competitive advantages, good management/leadership, and excellent earnings power.
This philosophy has allowed Berkshire Hathaway to significantly outperform the market this year. While the S&P 500 is down about 12% year to date, Berkshire Hathaway is up about 9% year to date as of April 29. Over the past year, Berkshire Hathaway is up roughly 17%, while the S&P 500 has been basically flat. That one-year return is roughly in line with Berkshire Hathaway’s performance over the past 10 years, as it has an average annual return of about 15% as of the end of April. The S&P 500 has an average annual return of about 11% over that same 10-year period.
Flight to quality
As a stock, Berkshire Hathaway has a lot of the qualities that Buffett would look for in an investment. It is undervalued, with a price-to-earnings ratio of about eight, and it is efficient with a 41% operating margin — which is the profit a company makes after expenses are paid. And, as mentioned, it has a ton of cash, about $146 billion, with $61 billion in free cash flow — which is the cash it has after accounting for cash outflows to support operations. Buffett has Berkshire Hathaway well-positioned to ride out the market volatility and continue to produce long-term returns.
It is a great investment, but with a stock price of $325 per share, it may be too expensive for some investors to buy multiple shares. But investors should know that most brokerages offer fractional shares investing, which allows you to invest by the dollar amount, not the share price.
So, if you only had $200 to invest, that wouldn’t be enough for a full share of Berkshire Hathaway. But with fractional shares investing, or stock slices, as some call it, you could invest that $200 and buy whatever fraction of a share that amount represents. In this case, $200 would buy you about 61% of a share at Berkshire Hathaway’s current stock price. That 61% of a share would earn the same returns as a full share, and if you invested say $50 per month in it, you’d soon have a full share and then some.
Now, you could take that $200 and buy a bunch of shares of a penny stock, but in this market in particular, you’ll have a hard time finding a company that’s built for the long haul like Berkshire Hathaway.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
