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This Stock Has Beat the Market in 10 of the Last 13 Years

Matthew Frankel, CFP, The Motley Fool

2018 was not a pretty year for the stock market. Even when factoring in dividends, the S&P 500 produced a negative 4.4% return for the year, and most other major indices didn't do much better.

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by Warren Buffett, delivered a 3% gain for investors in 2018. While this means that Buffett and his team beat the market last year, the really impressive statistic is that Berkshire has now officially beat the market an impressive 10 times in the past 13 years.

Man with money falling around him.

Image source: Getty Images.

Berkshire Hathaway's impressive track record

It's a well-known fact among investors that Berkshire has a long history of strong performance. Since Buffett took over in the mid-1960s, Berkshire has delivered annualized returns of more than 20%.

While it's certainly true that the most impressive returns occurred early in the company's Buffett-led history when it was a relatively small operation, you might be surprised to learn that this half-trillion-dollar conglomerate still beats the market consistently. Here's a look at Berkshire's recent performance versus the S&P 500:

Year

Berkshire Hathaway Price Change

S&P 500 Total Return

2006

24.1%

15.8%

2007

28.7%

5.5%

2008

(31.8%)

(37%)

2009

2.7%

26.5%

2010

21.4%

15.1%

2011

(4.7%)

2.1%

2012

16.8%

16%

2013

32.7%

32.4%

2014

27%

13.7%

2015

(12.5%)

1.4%

2016

23.4%

12%

2017

21.9%

21.8%

2018

3%

(4.4%)

Total Return

247.8%

164%

Annualized Return

7%

3.8%

Data Source: 2009-17 returns from Berkshire Hathaway's annual shareholder letter. 2018 returns from YCharts.

Note that this performance spans a variety of market climates. It includes part of the pre-financial-crisis bull market, the dismal 2008 crash, the record-long bull market that followed, and the recent correction. And it's interesting to note that Berkshire's three underperforming years weren't in just one type of market. 2009 was a great year for the market, but 2011 and 2015 were not.

How Berkshire beats the market so often

I could write a book about how each of Berkshire's businesses is designed to generate outstanding returns on equity, how Berkshire uses money from its insurance operations to fund growth, and how Buffett has a knack for spotting value in the stocks he buys.

However, there's a simpler explanation than that. The priority of Buffett and his team isn't to beat the market every year (although market-beating performance is certainly one of their long-term goals). Instead, Berkshire's managers aim to:

  • Increase Berkshire's earning power every year. In other words, the earnings potential of all of the company's businesses and investments should always be greater than it was a year ago.
  • Increase Berkshire's book value every year. In fact, Berkshire's book value has increased in all but two calendar years since 1965. On a valuation note, although Berkshire's stock price has increased by 248% over the past 13 years, it's actually trading for 12% less relative to its book value.
  • Avoid taking big hits when the market does poorly. Over the past 54 years, the S&P 500 has produced negative total returns 12 times. And Berkshire Hathaway has beat the index in all but two of those down years.
  • Add businesses and stocks to the company's portfolio while paying less than they're truly worth. This is the secret sauce. Buffett's uncanny ability to find acquisitions that add more value than their purchase price and to buy stocks at excellent long-term valuations has been a big part of Berkshire's outperformance.

The combination of these principles has allowed Berkshire to produce amazing returns over time. Out of the first 53 years with Buffett at the helm, Berkshire's stock price increased by more than 20% in 28 of them. And while it wouldn't be realistic to expect a 2,400,000% total return over the next 53 years (yes, the stock did that well over its first 53 with Buffett's leadership), even as a half-trillion-dollar company, Berkshire still beats the market more often than not.

A great stock to buy and hold forever

I've written before that if I could only own one stock, it would be Berkshire Hathaway -- hands down. With more than 60 subsidiary businesses and a portfolio of more than 40 stocks, it's like buying a diversified portfolio all in one stock. And it's a diversified portfolio with a proven track record of delivering market-beating returns over long periods of time.

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Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.