Warren Buffett Just Beat the S&P 500 by the Widest Margin Since 2007. Can He Do It Again in 2023?

Warren Buffett’s Berkshire Hathaway (BRK.A 0.08%) (BRK.B 0.06%) gained 3.3% for investors in 2022, compared to the S&P 500‘s loss of 18.1% with dividends reinvested. Berkshire hadn’t outperformed the S&P 500 by such a wide margin since 2007. And it did so even though the largest holding in its investment portfolio, Apple (AAPL 2.15%), fell more than 26%.

The question now is whether Berkshire can follow up its 2022 performance with another banner year in 2023. If Berkshire does beat the market, here’s what it could mean for your portfolio.

An oil and gas refinery during the daytime.

Image source: Getty Images.

Finding value across all sectors

Although Buffett is known as a bargain hunter, his recent track record shows he doesn’t shy away from adding to his positions even at higher prices. Apple, Chevron (CVX -0.02%), and Occidental Petroleum (OXY -0.05%) make up a combined 50% of Berkshire’s public equity holdings. Yet Buffett has only been buying Apple stock since 2016, Occidental since 2019, and Chevron since 2020. Instead of avoiding new purchases as prices rose, Buffett and his team added to their winners, possibly because they still considered these stocks undervalued.

Berkshire’s public equity portfolio consists of over 50 companies. But 85% of the portfolio is concentrated in the 10 largest holdings. Included in those top 10 holdings are companies in the tech, financials, energy, consumer staples, and communications sectors.

Berkshire has held companies like Coca-Cola and American Express for decades. But relatively recent moves show that Buffett and his team aren’t afraid to revamp their portfolio if they find value in other areas.

What it takes for Berkshire to beat the market

Berkshire’s holdings and recent moves showcase a strategy that is far bolder than the Oracle of Omaha often gets credit for. A few key points are summarized below:

  • Heavy concentration in a select few industry-leading companies.
  • Investing in companies with inexpensive or at least reasonable valuations.
  • Investing across all sectors of the economy.
  • Adding to winning positions even if the stock price has grown much higher.

Given the investment style of Buffett and his team, it is harder for Berkshire to beat a raging bull market than a flat or falling market. Berkshire’s returns from 2010 to 2022 show noticeable underperformance during years when the market was doing very well. For example, in 2020, Berkshire produced a return of just 2.4% compared to 18.4% for the S&P 500 with dividends reinvested. The year before that, Berkshire returned just 11%, compared to a 31.5% total return for the S&P 500.

Buffett doesn’t tend to overpay for companies or chase market trends. So when the valuations are expanding, and unprofitable growth stocks are leading the market, expect Berkshire to underperform. By the same token, if valuations are compressing and value stocks outperform growth stocks, expect Berkshire to beat the market.

However, given Berkshire’s concentration in just a handful of stocks, Berkshire could underperform in a value-orientated market if there’s an issue with one of the top holdings. One of the main reasons Berkshire was able to beat the market in 2022 despite Apple’s underperformance was that the energy sector did well. Chevron’s stock rose over 58% in 2022, and Occidental went up 119% — which more than made up for Apple’s underperformance.

Lessons from Berkshire’s portfolio allocation

Berkshire’s past performance and present allocation indicate the benefits of operating a diversified portfolio with a principled strategy. Berkshire is upfront with the objective of its portfolio, which is to beat the stock market over the long term in a regimented way that doesn’t expose its investors to unnecessary risks.

When Berkshire ramps up its holdings in a particular stock, it’s typically for a good reason. Therefore, scanning the list of Berkshire holdings can be a helpful starting point for finding balanced companies as well as foundational dividend stocks.

All told, we can all learn a thing or two about the way that Berkshire manages a disciplined portfolio by aligning risk tolerance and objectives with its investment strategy — and more importantly, by focusing less on beating the market in a given year and more on accomplishing financial goals over a multi-decade time horizon.

American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.