Warren Buffett has an incredible track record of outperforming the S&P 500.

At the start of every Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) annual report, he shares the annual returns of Berkshire Hathaway compared to the S&P 500 (with dividends included) for every year dating back to 1965, the year he took control of the business. The results are nothing short of remarkable. Berkshire Hathaway’s compound annual return since Buffett took over is 19.8% compared to 10.2% for the S&P 500.

Buffett managed to achieve those results through all sorts of markets and economic conditions. His sole focus on finding great companies trading at a fair price has served him and his investors well. These stocks generally have greater downside protection along with the potential to outperform the overall market.

So, when Buffett identifies a company he thinks should outperform the market averages going forward, investors pay attention. Buffett shared his expectations for one such company in his most recent letter to shareholders.

Image source: The Motley Fool.

The one stock Buffett says should do better than average

Buffett manages a $376 billion portfolio of equities with the help of Berkshire’s other investment managers, Ted Weschler and Todd Combs.

Buffett has praised the operations and management teams for some of his largest holdings, including Apple, Bank of America, American Express, and Coca-Cola. Those four positions combined account for more than two-thirds of the entire portfolio. And Buffett is happy to hold those stocks indefinitely.

Buffett and his team have recently bought significant stakes in Occidental Petroleum and Liberty Media’s Sirius XM tracking stock, Liberty SiriusXM. The former has grown into a substantial position in the portfolio, especially when you account for Berkshire’s preferred shares of Occidental. Buffett praised Occidental CEO Vicki Hollub in his most recent letter to shareholders, too.

But none of those are the one stock Buffett thinks should do better than average. Or maybe all of them are.

That’s because Buffett believes Berkshire Hathaway itself is the company to own. Not only does it have a portfolio of great equity investments, but it also owns an insurance business, railroads, utility and energy businesses, and dozens of other operations.

“With our present mix of businesses, Berkshire should do a bit better than the average American corporation,” Buffett wrote to shareholders. But he didn’t stop there. He also believes Berkshire’s cash position and minimal capital needs means Berkshire “should operate with materially less risk of permanent loss of capital.”

Buffett isn’t promising the moon with an investment in Berkshire Hathaway. In fact, he believes the days of trouncing the S&P 500 are in the distant rearview mirror for the company due to its massive size ($862 billion as of this writing). “Anything beyond ‘slightly better’ … is wishful thinking,” he wrote.

It’s also worth echoing his comments from the 2020 Berkshire Hathaway shareholder meeting. “I happen to believe that Berkshire is about as sound as any single investment can be in terms of earning reasonable returns over time, but I would not want to bet my life on whether we beat the S&P 500 over the next ten years.” Just because something should beat the market by any reasonable fundamental analysis, doesn’t mean it will.

Buffett puts his money where his mouth is

Buffett isn’t just the CEO of Berkshire Hathaway, approximately 99% of his wealth is tied to the company. He says his family members are also extremely invested in the success of Berkshire. He talks about his sister Bertie in his most recent letter to shareholders, noting she and her three daughters have a large portion of their savings in Berkshire shares.

In other words, Buffett cares tremendously about Berkshire Hathaway and its shareholders. And as he notes, “Caring doesn’t guarantee results, but it does guarantee attention.” And Buffett’s attention is historically worth quite a bit.

Moreover, Buffett has been putting a large portion of Berkshire’s extra cash to work by buying shares of Berkshire Hathaway. The board of directors overhauled its capital return program in mid-2018, authorizing Buffett to buy back shares of the stock whenever he and Vice Chairman Charlie Munger believed the price of shares fell below its intrinsic value. Buffett is now the sole determinant of the stock’s value since Munger’s passing.

Since the change, Buffett has bought back $74 billion worth of Berkshire Hathaway shares. “Such repurchases,” Buffett points out to shareholders, “work to increase your participation in every asset that Berkshire owns.”

Despite Buffett’s notion that Berkshire holds a set of businesses that should outperform the average corporation, the stock trades at a forward price-to-earnings ratio of just 17.7x. By comparison, the S&P 500 trades at a forward PE of 20.8x.

What’s more, Berkshire holds a massive cash position of about $167.6 billion while Buffett continues to buy back shares every quarter. Both factors should give the stock a valuation premium. Instead, it appears to be a great bargain, especially considering the businesses and equity portfolio investors get for the price.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.