I spend more time than is reasonable or probably healthy thinking about Warren Buffett.
This is certainly not because I believe that by studying his ways I can emulate his success. I know for a fact that I can't. That's why I don't buy stocks. I dollar-cost average into cheap index funds and never, ever sell.
Rather, it's more that the chairman and CEO of Berkshire Hathaway (BRK.B) is just kind of endlessly fascinating in the way that all great outliers are. If I were a basketball writer instead of a financial writer, maybe I would obsess over Michael Jordan or LeBron James the same way.
If there's a difference between Buffett and Jordan or James, well, I'd like to believe that when you study the stats, the records, the performance of the former, you're gathering more than mere trivia. There are lessons to be learned, I think?
And so, without further ado, I'd like to share some random facts and thoughts about Warren Buffett and Berkshire Hathaway. Some of what follows is very much for beginners, but I hope that even the most knowledgeable Buffettologists might glean something new.
Warren Buffett's incomparable returns
Berkshire Hathaway was a down-and-out New England textile manufacturer when Buffett gained majority control of the company in 1964. It was a somewhat hot-headed move – one that he could have easily come to regret. But Buffett wisely turned Berkshire into a holding company, or a company that owns other companies. Critically, Buffett focused on acquiring insurance companies.
There's more to running an insurance company than managing risks and maintaining reserves, but when handled correctly, they are amazing cash machines. Policyholders send in their premium checks every month, and those, in turn, can be turned into a river of free cash flow.
That cash can then be used to buy stocks in other companies or to acquire them outright. (Berkshire Hathaway currently owns more than 60 subsidiary companies, while Berkshire Hathaway's portfolio holds more than 50 stocks and ETFs.)
This is the basic Buffett playbook, and it's created stupendous returns for shareholders.
Between 1965 and 2022, shares in Berkshire Hathaway generated an annualized return of 19.8%. The S&P 500, by comparison, delivered an annualized total return (price change plus dividends) of 9.9%.
Even without paying dividends, Berkshire Hathaway stock doubled the performance of the broader market under Buffett's stewardship. That's an incomparable feat of investing acumen.
What do these returns look like on an account statement? Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, notes that if you had invested $10,000 in Berkshire Hathaway in 1968 and left it untouched for 50 years, your nut would have grown to $85 million. (To be fair, adjusted for inflation, 10 grand in 1968 is the equivalent of about $90,000 today.)
Plenty of stocks have outperformed Berkshire Hathaway over the past couple of decades – there's a reason why almost half of Berkshire's equity portfolio is sunk into Apple (AAPL) stock – but there's no denying Buffett has clobbered most of the competition most of the time.
Between 1990 and 2020, Berkshire Hathaway stock created $504.1 billion in wealth for shareholders, generating an annualized return of 11.7% along the way. Such performance made Berkshire Hathaway one of the 30 best stocks in the world over those three decades.
Warren Buffett adores dividends
I mentioned dividends above, which are great for juicing a stock's total return over long periods of time. And yet Berkshire Hathaway famously hasn't paid a dividend itself since 1967. Why? Because when you invest with Warren Buffett, you're betting on his skills as an allocator of capital. You're in effect trusting him to generate a superior rate of return to whatever the yield on Berkshire's dividend would happen to be.
The indicated yield on the S&P 500 currently stands at 1.6%. Let's say BRK.B sported a dividend yield more than twice that level, or more than 3%. Buffett's track record of nearly 20% annualized returns since 1965 suggests that he's better at investing your cash than you are. Why would you want him to return some of it to you in the form of dividends? So you can experience the joys of opportunity cost?
That said, Buffett absolutely loves collecting dependable dividends on behalf of Berkshire Hathaway. He often mentions the company's haul from its blue chip dividend stocks in his annual letters to shareholders. There's no question the loot is worth hyping. Consider this: in 2022, Buffett's five top holdings collectively paid Berkshire Hathaway about $3.6 billion in cash dividends:
- Apple: $815 million
- Bank of America: $869 million
- Chevron: $922 million
- Coca-Cola: $704 million
- American Express: $302 million
Dividends and distributions from all of Berkshire's investments and subsidiaries topped $15 billion last year. To give that some context, revenue from Berkshire's non-insurance operations totalled $52 billion in 2022. In other words, the company cashed checks equivalent to 28% of all the revenue it generated from its energy businesses, railway operations and other services activities combined.
Warren Buffett doesn't do diversification
For most of us, diversification is an investor's best friend. That's because most stocks fail to beat the market. Indeed, all of the market's returns since 1926 were driven solely by the top-performing 4% of stocks. Almost no one can reliably find these needles in the haystack. That's why Jack Bogle, the Vanguard founder and pioneer of index investing, evangelized the concept of diversification. To paraphrase Bogle, investors should just buy the haystack.
The problem with buying the haystack is that an S&P 500 ETF will slightly underperform the benchmark index because of fees. While indexing is clearly the best way to go for most retail investors, it would never do for Warren Buffett. He's said more than once that diversification is for people who don't know what they're doing. And given that most professional fund managers can't beat their benchmarks, he's right.
Don't try this at home, but Warren Buffett has always maintained a highly concentrated portfolio at Berkshire Hathaway. True, the company counts more than 50 stocks and ETFs as holdings. Note, however, that many of these are picks made by co-portfolio managers Ted Weschler and Todd Combs. Most importantly, almost all of them account for teeny tiny parts of the portfolio.
Here's the breakdown: Apple alone accounted for more than 46% of the total value of Berkshire's stock portfolio as of the end of the first quarter. Berkshire's top five holdings comprised 78% of the total, while the top 10 holdings made up more than 90%.
Although Berkshire owns scores upon scores of equities, very few are individually material to performance. And that's just how Buffett likes it.
"Over time, it takes just a few winners to work wonders," Buffett said in Berkshire Hathaway's 2022 annual report. "And, yes, it helps to start early and live into your 90s as well."
Warren Buffet's secret is compounding
That last quotation brings us to the most important point of all: compound interest.
Ask Warren Buffett and his partner Charlie Munger about the secret to their success and they'll say that it's all about avoiding big mistakes.
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent," Munger has said.
That's absolutely true. Avoiding costly mistakes has been critical. But the real driver of Buffett's success has been the miracle of compounding.
There's a sort of talismanic number in compounding: 7.18%. (It's actually closer to 7.17732%, but let's not nerd out too much here.) If you can achieve an annualized return – also known as a compound annual growth rate – of 7.18%, your initial investment will double every 10 years.
Berkshire Hathway has done far better than 7.18%, and you can see the effects on Buffett's net worth. Even after contributing billions to charity, Buffett's net worth has compounded along with his Berkshire holdings.
Here's what compounding looks like in action: in 1992, Buffett's net worth was estimated at about $5 billion. In 2022, his fortune had grown to about $100 billion. Put another way, 95% of Buffett's lifetime wealth accumulation occurred in the three decades after he turned 62.
Or look at it this way: a decade ago, Buffett's net worth was estimated at about $59 billion. Today, he's worth something like $112 billion. His fortune grew by about 90% in just the past 10 years – or after he turned 82.
Happily for us non-billionaires, the S&P 500 has generated an inflation-adjusted annualized return of at least 7.1% over the past 30, 20, 15 and 10 years. The market has basically been doubling our money or better for decades.
No, past performance doesn't guarantee future results, but history and compounding are as much on our side as they were on Warren Buffett's.
If nothing else, the Oracle of Omaha is living proof of a hackneyed finance joke about compounding:
Question: How do you make a great fortune on Wall Street?
Answer: Start with a small one.
