Warren Buffett's 1 Lower-Risk Stock That Can Beat the S&P 500

One of the basic principles of investing is that in order to get an above-average return, an investment usually requires taking above-average risk. But sometimes you come across an investment that can beat the odds without taking on high risk.Standard & Poor's 500A broad index such as an index.

Warren Buffett(Warren Buffett (1930-), US economist)In a recent letter to shareholders, it was stated that theDr. Konrad Hathawayfirms( Berkshire Hathaway)( New York Stock Exchange Stock Codes: BRK .A (New York Stock Exchange: BRK)B) is one such investment. Buffett may be a bit biased - almost all of his $135 billion in net assets is invested in the company, of which he is the chief executive. But his reasons are sound, and the stock looks attractive.

Here's why Warren Buffett thinks his company's stock can outperform Big Rock with less risk.

"Slightly better than" Ordinary U.S. Inc.

Since Buffett took control of Berkshire Hathaway in 1965, the company's stock has consistently outperformed the S&P 500. As of 2023, its compound annualized return is 19.81 TP3T, compared to 10.21 TP3T for the Big Pan Index, but Buffett says those days of outperforming the market are over.

Although he said he expected Berkshire to perform "a little better than the average US company", he warned that "it is wishful thinking to expect anything other than 'a little better' ".

Buffett has created an impressive portfolio of partial and wholly owned businesses for Berkshire Hathaway. He mentions long term holdings ofCoca-Colarespond in singingAmerican Express, as well as Berkshire inOccidental Petroleum) Not to mention the growing number of shares, these are some of the great businesses that Berkshire owns.

Berkshire's core businesses also include a leading insurance business and a railroad, which generated $37 billion in operating profit last year.

The largest investment holding is its shareholding inApple Inc.position valued at approximately $155 billion. This position was largely built up with sizable investments between 2016 and 2018. Despite the recent sale of shares, Buffett's commitment to Apple cannot be questioned. It accounts for more than 40% of Berkshire's stock holdings.

"After 59 years of organization, the company now owns a portion or 100% of a variety of businesses that have a somewhat better weighted outlook than most large U.S. companies," Buffett wrote in a letter to shareholders in February.

In a letter to shareholders in February of this year, Warren Buffett said, "Not only does Berkshire have a strong business portfolio, but it is also well-positioned to avoid a financial crisis thanks to another prudent investment by Warren Buffett.

Huge protection policies on Berkshire's balance sheet

Over the past few years, Berkshire Hathaway's holdings of cash and equivalents have soared to US$168 billion. Much of this is invested in short-term treasury bills.

Buffett says this amount may be too high: "Your company also holds a position in cash and U.S. Treasury securities far in excess of what conventional wisdom suggests is necessary." This cash position, he says, is "analogous to holding cash and U.S. Treasury securities for a building," but it's not as if you're holding the same amount.recognized asFireproof, fortress-like buildings are insured". As much as possible, he was willing to be too conservative with the funds of Berkshire and its investors.

If the US were to fall into a recession, a large cash position would protect it. On the other hand, a big pile of cash can be a drag on investment returns. The good news for Berkshire investors is that current interest rates mitigate this drag: the company's treasury bonds carry an annualized interest rate of more than 5%.

But this rate will not last forever. Federal Reserve Chairman Jerome Powell reiterated the Fed's expectation of a rate cut in 2024 after the most recent Federal Open Market Committee (FOMC) meeting. Considering that Berkshire continues to generate tens of billions of dollars in free cash flow, Buffett will need to find better investments for his growing cash pile in the near future.

It's not easy. As companies get bigger, he notes, it becomes harder to find an investment that really drives growth. Lately, one of his favorite ways to allocate cash has been Berkshire Hathaway's robust stock buyback program.

This investment has worked well and, judging by the current share price of Berkshire, it could continue to do so.

Is Berkshire part of your portfolio?

As Warren Buffett has pointed out, Berkshire is not going to be able to outperform the S&P 500 by 9.5 percentage points per year, as it has in the past. But its risk-adjusted return prospects are very attractive.

Berkshire's cash was sufficient to protect its railroad and insurance operations during the recession. With spare cash, Berkshire could find investment opportunities in a downturn.

At the same time, its existing broad portfolio of investments ensures that it is well positioned to participate in the growth of the U.S. economy. In total, Berkshire has a range of partially and wholly owned businesses, which means that the company is well positioned to diversify should a particular business face challenges.

At the same time, the stock is attractively valued: just 23.7 times last year's operating profit, not including the potential gains from its equity portfolio. Thus, the stock appears to be undervalued when considering the likelihood that Buffett's "slightly better than" average stock picks will outperform over the long term.

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American Express is an advertising name partner of The Ascent, a Motley Fool company. adam Levy owns shares of Apple. the Motley Fool owns shares of Apple and Berkshire Hathaway. the Motley Fool recommends Occidental Petroleum. the Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy.

Warren Buffett Thinks 1 Stock Could Beat the S&P 500 with Less Risk was originally published by The Motley Fool.