Stock markets broadly trended lower on Wednesday after a disappointing inflation report. The Consumer Price Index (CPI) rose 3.5% in March over the previous 12 months. That reading is up from 3.2% in February and better than the three.4% that was anticipated by economists. It’s also the best rate since September 2023.
The markets didn’t take the news well. There had been hope that the inflation rate would keep trending lower, which in turn would hopefully prompt the Federal Reserve to lower rates of interest sooner somewhat than later.
Nevertheless, the March inflation result could indicate that the Fed may not start easing as soon as some had anticipated. All eyes will likely be on the Personal Consumption Expenditures (PCE) index, a key inflation gauge for the Fed, when it comes out on April 26.
Investors have already been through the worst of it so far as inflation goes, but in the event that they are searching for a stock that has largely been proof against inflation to balance things out, look no further than Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
The home that Buffett built is sturdy
Berkshire Hathaway Chairman and CEO Warren Buffett and the late Charlie Munger built the firm precisely for times like this: to face up to shocks to the market like inflation rates at a 40-year high, like they were in 2022.
The conglomerate is basically made up of a $350 billion stock portfolio and the virtually 70 privately held firms it owns, including brand names like GEICO, Dairy Queen, Benjamin Moore, Duracell, and Business Wire, to call just a few.
Amongst the businesses Berkshire owns are several insurance firms, including ones it also manages, like Berkshire Hathaway Specialty Insurance and Berkshire Hathaway GUARD Insurance Corporations, together with GEICO and others.
Berkshire Hathaway uses the float from the insurance firms to take a position in its massive stock portfolio. As well as, it also owns a railroad, energy and utility firms, industrial firms, manufacturing firms, retailers, construction and constructing businesses, consumer staples, and repair firms.
Jeff Bezos once asked Buffett:
“You’re the second-richest man on the planet and yet you could have the best investment thesis. How come others didn’t follow this?”
Warren Buffett responded: “Because nobody desires to get wealthy slowly.” pic.twitter.com/6lKYdFCh3t
— Warren Buffett Stock Tracker (@BuffetTracker) March 27, 2024
Buffett and his team have rigorously chosen those firms and those in Berkshire’s stock portfolio, adhering to Buffett’s philosophy of investing in businesses which are well-managed, are good values, have consistent earnings, and are generally sturdy, stable businesses across a wide range of industries which have long track records of success.
That formula has worked beautifully for Berkshire Hathaway over time and has allowed the corporate to effectively manage the markets’ ups and downs over the past 50+ years.
Consider the outcomes. When the market is down, Berkshire Hathaway is normally up. That was the case in 2022, when the stock was up 3% in a 12 months when the S&P 500 was down 19%, mainly resulting from high inflation and rising rates of interest. In 2018, when the market was off 6%, Berkshire Hathaway was up 3%.
Over the past 10 years, Berkshire Hathaway has posted a median annualized return of 12.7%, in comparison with 10.6% for the S&P 500. Going back 20 years, it has generated a 9.8% annualized return, in comparison with 7.8% for the S&P 500.
At all times a buy
Considered one of the explanations Berkshire Hathaway did so well in probably the most recent bear market was due to abundance of firms it owns in industries that aren’t susceptible to wild swings based on economic conditions. For instance, firms in consumer staples, energy, and insurance are needed regardless of the environment, so that they weren’t as impacted by inflation.
Actually, Berkshire Hathaway’s insurance holdings outperformed within the bear market, as insurance firms actually do fairly well in periods of high inflation because premiums go up, but people still need insurance.
The proof is within the incontrovertible fact that Berkshire Hathaway reported record operating earnings of $30.9 billion in 2022, surpassing that record again in 2023 when it generated $37.4 billion in operating earnings. Nevertheless, the gains in its portfolio of privately owned firms in 2022 offset the unrealized losses in its stock portfolio that 12 months.
Like the businesses it invests in, Berkshire Hathaway is built for the long haul. It probably won’t soar like a technology company in a bull market, but it can produce consistent, reliable returns that investors can count on — in good times and bad.
This 12 months, the stock has popped about 13% 12 months so far, and it’s undervalued with a price-to-earnings ratio of 9. Berkshire Hathaway is just about all the time a buy, but at once it looks particularly good.
Disclaimer: All investments involve risk. Under no circumstances should this text be taken as investment advice or constitute responsibility for investment gains or losses. The knowledge on this report mustn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.