Why is Warren Buffett Still So Bullish on US Stocks?

In his annual letter to Berkshire Hathaway [BRK-B] shareholders, his first since the passing of Charlie Munger, Warren Buffett described his former right-hand man as the “architect” and himself as the “general contractor” whose job it had been to construct Munger’s vision.

Berkshire Hathaway’s value rose 15.8% in 2023, taking its overall gain since 1964 to 4,384,748%.

While the firm underperformed the S&P 500’s 26.3% climb last year, since 1965, it has beaten the benchmark’s 31,223% gains. But Buffett used his shareholder letter — published on 24 February — to warn that the days of “eye-popping performance” are over because the “handful of companies in this country capable of truly moving the needle at Berkshire” have already “been endlessly picked over”, by itself and others.

However, he added, the stock “should do a bit better than the average American corporation” due to its size — its net worth is 6% of the total of the S&P 500 companies.

The Omaha-based investment firm’s “extreme fiscal conservatism” helped it to grow its cash position to $167.6bn in cash at the end of Q4, a jump from $157.2bn at the end of the prior quarter. Its operating earnings rose 21% year-over-year from $30.9bn to $37.4bn, propped up by insurance underwriting earnings and investment income.

Despite sitting on a record cash pile, Buffett, the so-called Oracle of Omaha, said he “can’ t remember a period since 11 March 1942 — the date of my first stock purchase — that I have not had a majority of my net worth in equities”.

The annual letter shed some light on Berkshire’s current holdings and its stance on both US and foreign investments.

American Express and Coca-Cola Will Be Held “Indefinitely”

Apple [AAPL] is Berkshire’s largest stock holding, accounting for half of its stock portfolio. As of 31 December 2023, it held 905.6 million shares worth $174.3bn, although it did sell 10 million shares in the final three months of the year. The iPhone maker is only mentioned once in the letter.

Buffett did have plenty to say about American Express (Amex) [AXP] and Coca-Cola [KO], which he says Berkshire will hold “indefinitely” due to their earnings and dividend growth. The two established stocks are the third- and fourth-biggest holdings in Berkshire’s portfolio, accounting for 8.2% and 6.8%, and worth $28.4bn and $23.6bn, respectively, as of 31 December 2023. 

Berkshire didn’t add to or sell any of its Amex or Coca-Cola stakes last year and doesn’t plan on touching them in 2024, either.

“When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable,” advised Buffett.

Occidental Petroleum is a Carbon-Cutting Play

Another position that Berkshire intends to maintain is Occidental Petroleum [OXY], the sixth-biggest holding in the firm’s stock portfolio, accounting for 4.2%. Buffett owned 27.8% of the oil producer’s common shares as of 31 December 2023, worth $14.6bn, but he used his annual letter to reiterate that his firm won’t be looking to purchase or manage Occidental outright.

He highlighted Occidental’s domestic oil and gas holdings as one of the major reasons why he’s bullish on the stock. Others are the company’s strong leadership and its carbon capture investments. Last year, Occidental bought carbon capture technology firm Carbon Engineering for $1.1bn. The acquisition is part of the US oil producer’s push to build more than 100 plants that can utilise direct air capture technology, which removes carbon dioxide from the atmosphere, after which it can be stored underground for future use in making products, including aviation fuel and concrete

Buffett was full of praise for Occidental CEO Vicki Hollub, who is leading the company in “doing the right things for both its country and its owners”.

He added: “No one knows what oil prices will do over the next month, year, or decade. But Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.”

Buffett’s Big Bet on Japanese Trading Houses

Like many US investors, Buffett is underweight when it comes to foreign investments. “Outside the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire,” he wrote.

While he didn’t share any details explaining his stance on foreign investment, Berkshire is maintaining its “passive and long-term interest” in five Japanese trading houses. It has built approximately 9% stakes in Itochu [8001:T], Marubeni [8002:T], Mitsubishi [MUFG], Mitsui [8031:T] and Sumitomo [8053:T]. Buffett could increase the stakes further this year, though has made a commitment not to hold more than 9.9%.

Combined, the five have a value of ¥2.9trn as of the end of 2023. This is a significant gain on the combined ¥1.6 purchase price. Rather than using its cash to finance its Japanese positions, however, Berkshire borrowed ¥1.3 on the Japanese bond market.

“This debt has been very well-received in Japan, and I believe Berkshire has more yen-denominated debt outstanding than any other American company,” wrote Buffett.

His confidence in the Japanese trading houses, which he added implement “shareholder-friendly policies that are much superior to those customarily practised in the US”, is being viewed by some market spectators as a catalyst for the Nikkei 225 gaining 42% in the past year through 5 March and 10.3% in the past month alone.

According to Tokyo-based Forbes columnist William Pesek, Buffett’s endorsement of Japan could make the BoJ’s job harder. The central bank’s Governor Kazuo Ueda will be wary about taking the momentum out of the stock rally, wrote Pesek at the end of February.

Regardless of what happens in the future, Buffett reassured shareholders: “Berkshire is built to last.”

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