If there is one person in the world whose name is synonymous with investing success, it’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett. Wouldn’t it be nice if the average person could make the same investments Buffett makes at the same time he makes them? The idea may seem crazy, but buyers of Berkshire Hathaway stock are doing just that.
Face it, there’s no way to get Warren Buffett to personally manage your 401k. But to invest your 401k like Buffett would, the trick is to not overthink it. Start by buying Buffett’s own company, Berkshire Hathaway.
Warren Buffett’s Investing Philosophy
The Warren Buffett philosophy is to invest in companies with attractive valuations and durable, competitive advantages in their respective industries. Buffett has always been a long-term investor, which is the perfect philosophy for a 401k.
Unlike many other famous hedge fund managers, Buffett has never traded in and out of stocks. He famously said if investors aren’t comfortable owning a stock for 10 years they shouldn’t own it for 10 minutes. So for investors focused on a 401k for retirement 10, 20 or 30 years down the line, that type of investing is right in Buffett’s wheelhouse.
There’s no shortage of self-proclaimed experts out there telling investors how to invest like Warren Buffett. But guessing what Buffett might buy is completely different than buying what he’s buying in real time.
Berkshire Hathaway stock is essentially a Warren Buffet exchange-traded fund. Berkshire currently owns shares of more than 40 different stocks and a handful of private businesses as well. The key is that all of those holdings were all either approved by Buffett himself or chosen by other Berkshire portfolio managers that Buffett has signed off on.
Andrei Simonov, Chairperson of the Department of Finance, Broad College of Business, Michigan State University, referred readers to a paper titled “Buffett’s Alpha” by Andrea Frazzini, David Kabiller, and Lasse H. Pedersen in an email to InvestorPlace.
“It is indeed, remarkable,” Simonov wrote. “Sharpe ratio of BH is approximately twice of Sharpe ratio of S&P500. They showed that the key to Buffett’s success is the use of leverage (that is possible due to a cheap source of funding via insurance business) and stock selection of quality undervalued companies. Since most of the returns come from Buffett’s investments in publicly listed companies, it is unlikely that the value added is coming from management improvements.”
You don’t have to wait on CNBC to report what Buffett bought weeks or months after he bought it. It may seem too good to be true. But by buying Berkshire Hathaway stock, you are essentially buying every stock Warren Buffett is buying in real time, even before you know what stocks they are.
Buffett’s 2020 Critics
Warren Buffett has taken a lot of heat in 2020 for a couple of reasons. Buffett famously sold all his airline holdings near the market bottom back in March. Despite Berkshire’s massive cash balance, he also didn’t pull the trigger on any major acquisitions or buy particularly large stakes in any stocks during the sell-off. Even President Donald Trump took shots at Buffett’s relatively defensive approach to the market in 2020.
And of course, Berkshire Hathaway stock has lagged the overall S&P 500 in 2020. But that short-term underperformance is not unprecedented. Seabreeze Partners Management president Doug Kass says Buffett has always had critics, but his long-term performance has consistently made a joke out of his detractors. Kass says Buffett’s latest crew of critics focuses on nitpicking missteps like his airlines investments. Meanwhile, just a couple of years ago Buffett made Berkshire’s largest investment in history, Apple (NASDAQ:AAPL).
“Berkshire currently owns 251 million shares at a cost of about $140/share ($35 billion). This equates to an unrealized gain of over $75 billion – marked to market,” Kass says.
Kass says Buffett’s 2020 critics are mostly recycling the same arguments that previous detractors used back when Buffett wasn’t buying into the tech stock hype during the dot com bubble in 2020.
“Warren got the last laugh, as he is likely to again in the upcoming market cycle,” Kass says.
And for the record, Berkshire stock is up 404% in the past 20 years compared to just a 128% gain for the S&P 500.
An Extra Layer of Protection
Berkshire Hathaway stock has the Warren Buffett seal of approval. It is extremely diversified. But it also has another layer of protection for 401(k) investors. In an uncertain global economic environment, Berkshire has $146.6 billion in cash and equivalents on hand. That number is up from $137.2 billion at the end of March, but it doesn’t mean Buffett hasn’t been spending. What has he been buying?
Berkshire reported a record $5.1 billion in buybacks in the second quarter, which tells investors all they need to know about how Buffett feels about Berkshire’s current valuation. If you are building a 401(k) investment portfolio, it’s hard to argue there’s a better place to start than Berkshire Hathaway stock.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long BRK.B.