Why I'm overweight Berkshire Hathaway and the S & P 500.

Why I'm overweight Berkshire Hathaway and the S & P 500.

                                Michael & Heather Hooper at the Getty Center, Los Angeles.

By Michael Hooper

About two-thirds of my Investment Portfolio are two Equity positions. One-third is in iShares S&P 500 Index ETF (IVV), a core S & P 500 ETF. The other third is in Berkshire Hathaway, a stock I began buying 21 years ago. 

In the early 1990s a friend of mine named Leroy Fletcher told me his investment strategy, his 401k was all invested in an S&P 500 index fund. He also had a brokerage account where he traded stocks to some degree of success but always depended on the S & P 500 to create enough wealth to retire on, which he did successfully and has continued to live an amazing life. 

The S & P 500 is the standard by which all big cap mutual funds are measured, but most money managers cannot beat the index. So why not just own the index? So far this year the S&P 500 is up around 7% through August 23rd 2018. Meanwhile the performance of Emerging Markets and international Investments have lagged behind the performance of the S & P 500. Earnings growth is higher here in America than overseas, largely because of a growing economy that Trump inherited from President Obama. We've seen the longest bull market in history. Trump's tax cuts for corporations are also driving stock prices higher.

It's a good time to be overweight US stocks because economic indicators are bullish. Unemployment is low, consumer spending is strong, retailers did well over the summer. People are buying houses and spending money at Home Depot.

I like Berkshire Hathaway because of its tremendous collection of great businesses, like BNSF Railway, Precision Castparts, Geico and BH Energy Group. The 100 companies owed by Berkshire Hathaway generate tremendous amounts of cash every month. Warren Buffett has excellent managers who are leaders in their fields.

Berkshire Hathaway is prepared to buy back shares of its stock. The company in July 2018 changed its policy for its buyback program, now it's more liberal, managers are not restricted to buying only at 1.2 times book value but may buy at higher levels. Now the policy allows management to buyback stock when they believe it is trading below intrinsic value conservatively estimated.

I had seen Berkshire Hathaway stock price fall to 1.35 x book value over the summer when the B shares were trading at 187 per share. Then Berkshire Hathaway made an announcement about his buyback policy and the stock jumped 5%. Now the stock is trading somewhere around 206 per share and the stock is trading at 1.42 times book value. 

It's hard to compare Berkshire Hathaway to any other company because it's so unique, however General Electric is a conglomerate with Industrials.

I remember when General Electric was trading at 3.01 times book value. I knew eventually GE's market value would fall because there was no reason to be valued at such a premium when it's having some problems.

Even though GE stock price has fallen dramatically to about $12.50 per share, the stock is still trading at a premium to Berkshire Hathaway relative to the measure of price-to-book ratio. GE's Price to Book ratio is 1.965 compared to Berkshire's 1.42 price to book ratio.

Berkshire Hathaway has traded at 1.5 times book value in the past and I suspect it will again when people realize it's still cheap compared to its peers.

I like the fact that Warren Buffett has been hoarding cash over the past couple of years while stocks have been at relatively high prices based on PE ratios.

Perhaps Buffett is getting prepared for the next downturn, whether he's around or not. With over $100 billion in cash, there is a lot of capital available to be deployed when the time is right. Warren Buffett is best in a downturn, just look at how he performed during the economic crisis of 2008 2009 when he bought BNSF Railway and made a bunch of deals with loans with high interest rates to Major Banks like Goldman Sachs. Let's face it Buffett made a killing on the stock market crash, investing at the bottom and watching valuations double and triple over the next nine years. His returns have been outstanding.

The last stock market crash was one of the greatest money-making opportunities of my lifetime. Buffett has seen plenty of opportunity with the cheap stocks of the 1970s when he was buying some stocks at three times earnings. he bought BNSF Railway at 18 times earnings in 2010 but saw a long Horizon of earnings, making an all-in bet on the US economy at the time. The railroads have rebounded and are chugging along hauling goods before the US tariffs are enacted. In the last quarter BNSF hauled tons of steel. Manufacturers need the steel because consumers are demanding these products but eventually things will slow down someday. The Tariffs proposed by Trump will probably be a factor in the next recession. 

It's hard to say when the next recession will happen but I predict that stock indexes could possibly be the same today as they are a year from now. Sometimes policies take six months to take effect but already we're seeing some reduction in sales of products that would normally go to Europeans but because prices will be higher under the tariffs foreign customers are balking at buying US boats for example.

So when there's another downturn -- and believe me there will be another recession -- I couldn't think of a better company than Berkshire Hathaway to have in my portfolio, a company with expertise in how to profit from downturns. 

I sold most of my Bitcoin and all of my ethereum. I diversified my profits into gold, cannabis stocks and house improvements with a trip to California to celebrate 25 years of marriage with my wife Heather. Sometimes, it is best to take a profit and diversify the gains.