Noted investment mogul Warren Buffett provided us with a few pearls of wisdom as Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) released its annual letter. Berkshire has been one of the most successful companies on the S&P 500 in the last five and a half decades. In this period, the stock has returned astonishing returns of 20% annually, compared to the S&P 500 returns of 10%.
This means if you invested $100 in Berkshire Hathaway stock back in 1965, your investment would have ballooned to $2.7 million by the end of 2020. A similar investment in the S&P 500 would now be worth $23,000 in this period.
These returns are pretty impressive, given Berkshire has underperformed the broader market in the past decade. While the Oracle of Omaha did not directly address this underperformance, he said that investing in the financial conglomerate might not be the ideal option for every investor.
Let’s take a look at some of the most interesting quotes from this year’s annual letter.
Buffett accepted he made a mistake by investing in the manufacturing company Precision Castparts. Back in 2016, Berkshire acquired Precision for $32.1 billion to buy the aircraft and industrial parts manufacturer which was the company’s largest acquisition.
However, as the airline sector was decimated amid the COVID-19 pandemic, Warren Buffett said, “I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.”
In August 2020, Berkshire wrote-off close to $10 billion in Precision’s value as a result, and the latter downsized operations as well as laid-off 40% of its workforce. Investors should note that stock picking is not easy and is replete with challenges.
According to Warren Buffett, the U.S. economy will continue to remain strong despite near-term macro-economic challenges. He warned to never bet against the country that has experienced two world wars, multiple economic recessions, a cold war, and two pandemics in the last 107 years.
Interest rates in the bond markets are significantly lower despite the recent uptick that resulted in a sell-off in equity markets. Buffett said that income from 10-Year Treasury Yields has fallen over 90% from its high of 15.8% back in 1981 to 0.93% at the end of 2020.
Investors in the bond market will find it difficult to beat inflation which will mean their real value of money will depreciate over time. Companies on the other hand can take advantage of really low interest rates and the access to cheap capital can be leveraged to fund acquisitions, as well as capital expenditure projects, which in turn will help drive top-line and cash flow growth.
Warren Buffett is a huge fan of investing in companies that generate a steady stream of cash flows. Berkshire has invested in Canadian companies such as Suncor that are now trading at an attractive valuation due to the disruption in oil prices post COVID-19.
Investors can look to replicate this investment style and identify companies with an attractive valuation, a strong balance sheet with the potential to grow earnings and revenue at a fast clip.
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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.
The post Warren Buffett: The Equity Market Remains a Safe Bet for Long-Term Investors appeared first on The Motley Fool Canada.
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