Since he took over as head of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965, Warren Buffett consistently outperformed the broader stock market. Shares of its holding company are down sharply this year, but the stock is still up 2,833,951% from its humble beginnings.
Beating the benchmarks in any given year could be a matter of luck. After outperforming for nearly six decades, however, it’s clear that Buffett’s strategy is winning.
Like nearly every successful investor in history, Buffett shares his insights with anyone who wants to hear them. Additionally, Berkshire Hathaway must disclose its business activity at least once every three months.
The market has been generally lousy since Berkshire Hathaway last reported trading activity. This means you can pick up those shares for much less than the Oracle of Omaha paid.
marcel (NYSE: MKL) is often called the Berkshire baby of the stock market. The company’s long-term shareholders consistently outperform the benchmark S&P500 index. But that’s not the only thing he has in common with Buffett’s holding company.
Both Berkshire Hathaway and Markel have relatively large insurance businesses. Markel gets an ultra-cheap source of capital in the premiums it collects because there is a lag between when policyholders pay their premiums and when Markel has to repay money to cover claims.
Instead of buying the same fixed-income securities that most insurers rely on, Markel Ventures carefully uses its low-cost source of capital to acquire controlling stakes in profitable companies that can produce heaps of long-term value. In the first half of the year, the Markel Ventures segment posted a profit of $107 million.
Markel’s stock price has fallen about 23% from its spring high as a big net loss of $916 million in the second quarter spooked investors. If you look a little closer, however, you’ll see there’s nothing to worry about.
Markel’s investment segment owns stocks that fell sharply in the second quarter and, due to recent changes in accounting rules, the insurer must include these losses in its quarterly financial reports. A quick look under the hood shows that falling prices in the company’s stock portfolio were entirely responsible for Markel’s reported heavy loss. With its insurance and venture capital segments generating strong profits, the road ahead of this stock will be much smoother than its recent price performance suggests.
2. Allied Financial
Allied Financial (NYSE: ALLY) is by far the oldest fully digital bank in operation today. It was founded by General Motors in 1919 and remained an integral part of the automaker’s sprawling business until its split in 2010.
This is the largest addition Berkshire Hathaway has made to its equity portfolio in the second quarter. It’s fallen about 9% since late June, which means you can probably pick it up for a better price than Buffett was willing to pay a few months ago.
As you can imagine, Ally Financial is the source of many car loans. What you probably don’t realize is that this is a very lucrative niche.
The company reported an estimated 7.8% return on the auto loans it originated in the second quarter. Rising interest rates mean Ally will have to offer slightly higher rates on deposits to checking accounts and savings accounts. With such a high return on auto loans, there are still plenty of opportunities to make a profit.
In addition to auto loans, Ally Financial has begun offering direct-to-consumer mortgages and has a credit card business that is growing by leaps and bounds. At the end of the second quarter, credit card balances jumped 93% year over year to $1.2 billion.
Currently, Ally stock offers a dividend yield of 3.9% which it will most likely increase significantly over the next two years. The company has used only about 20% of the $2 billion in free cash flow it has generated over the past year to meet its dividend pledge. With a payout that could increase sharply over the next two years, this will be a relatively easy stock to hold for the long term.
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Ally is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares) and Markel. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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