3 reasons why Warren Buffett is outperforming the stock market in 2022

Many may have thought that Warren Buffett, at 91, is a little past his investing prime. And for a while, the numbers suggested that maybe he was.

Since the financial crisis of 2008-2009, technology stocks have accounted for an increasing share of the value of the S&P 500. The largest companies today are no longer in the industrial, consumer staples or energy sectors, but rather, technology stocks like Apple (AAPL -0.17% ), Microsoftand Alphabet. directed by buffett Berkshire Hathaway (BRK.A -0.22% )(BRK.B -0.29% ) it started buying Apple in 2016. But other than that, its strategy has remained largely focused outside of the tech sector and other growth areas.

Here’s why Buffett’s selected portfolio’s relative lack of tech stocks hasn’t hurt his performance, and why Berkshire shares are up 19% so far in 2022 with the S&P still down on the year. .

Berkshire Hathaway CEO Warren Buffett.

Image source: Getty Images.

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Berkshire Hathaway has stakes in more than 50 companies, and the conglomerate outright owns dozens of businesses. But in reality, most of the value of your stock portfolio is concentrated in a few large holdings.

For example, the top five Berkshire stocks: Apple, Bank of America (BAC -0.78% ), American Express (AXP 0.09% ), Coca Cola (KO 1.40% )and Kraft Heinz ( DIFFERENT 1.37% ) — make up 76% of the total stock portfolio. And the top three holdings alone account for 66% of its value.

Berkshire began buying Apple on May 16, 2016. Since then, Apple, Bank of America, and American Express have outperformed the Nasdaq Composite and the S&P 500.

AAPL Total Performance Level Chart

AAPL Total Performance Level data by YGraphics

When an investor has that much weight in three best-performing companies in the market and your best choice has grown sevenfold in less than six years, it’s hard not to beat the market. So while Buffett has mostly stayed out of tech, the top tech stock Berkshire picked has been a big winner, and the two biggest financial actions he owns have also been big winners.

hidden value

Aside from the public equity side of the business, the conglomerate also operates incredibly profitable insurance businesses, railroads, energy and utilities companies, manufacturing companies, service and retail companies, and more. These businesses generate earnings for Berkshire Hathaway in addition to the earnings earned by the investment portfolio.

He also owns a ton of assets. Looking at Berkshire Hathaway’s 2021 annual 10-K filing, we can see that the company ended the year with $350.7 billion in equity investments, but $958.8 billion in total assets once its $176.4 billion in property, plant and equipment, cash, inventories and other assets are taken into account.

Investment earnings accounted for 69% of 2021 net earnings, with business units producing the remaining 31%. In other words, there is much more to Berkshire Hathaway than the public securities it owns.

A resurgence of value investing

The third reason Buffett is crushing the market in 2022 is that there has been a pronounced shift in the market from growth stocks to value stocks. It started in 2021 when investors started selling hyper-growth stocks and pandemic winners and moving money to more profitable stocks on the growth side of the market. But in 2022, even big-name growth stocks like Netflix and Metaplatformshave fallen sharply from their highs, prompting a further shift towards true value stocks.

That market-wide move from growth to value plays to Buffett’s strengths. And there are plenty of reasons why the switch can be good for individual investors, too.

a healthy market

to invest in value stocks It makes more sense for people who don’t want to overpay for businesses, want to make passive income, or are more focused on not losing money than making a lot of money. Many traders got into trouble in recent years by stockpiling memes, altcoins, SPACs, and other hyper-growth stocks that were not valued based on their fundamentals. Dangerous investment styles can be tempting when they seem to be working, and betting on risky stocks, unproven model trades, and other speculative assets can work for a while. But in the long run, it’s not a sound investment style.

I think many investors would agree that they would rather have a stock market led by quality companies than a market led by speculation and greed. The change back to value is refreshing and could also be a good opportunity for you to add a Some of Buffett’s Major Actions to your diversified portfolio.

This article represents the opinion of the writer, who may disagree with the Motley Fool premium advice service’s “official” recommendation position. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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