Buffett Roots For Stocks Over Bonds In Annual Letter: 5 Picks

The Sage of Omaha published his annual letter on Feb 24. He remained bullish on U.S. stocks over the long term. After all, stocks have performed better than bonds in the long run. Inflationary pressure is also brewing looming concern. This will affect bonds more than stocks because of their lower returns.

Corporate America, in the meantime, has received a massive permanent tax break, which will further boost profits. Changes to the tax law has already provided the much-needed windfall to Berkshire Hathaway Inc. (NYSE:BRKa) BRK-B , whose market value rose 21.9% in 2017, edging past the S&P 500’s return of 21.8%.

Given the positives, investing in Berkshire’s largest stock holdings seems judicious. These companies have reliable business models that have stood the test of time.

Buffett’s Annual Letter to Shareholders: Stay Invested in Stocks

World’s third richest man, Warren Buffett, urged investors to ignore gyrations in the equity market, guidance from market pundits with fancy credentials and resist the temptation to scoop up bonds. He added that investors with long-term goals like pension funds and savings-minded individuals will make a “terrible mistake” if they measure their investment “risk” by their portfolio’s ratio of bonds to stocks.

As the investor’s investment horizon increases a diversified portfolio of equities do better than bonds. Lest we forget, the S&P 500 that mirrors a huge cross-section of American businesses has returned an average of 10% per year, while long-term government bonds have returned 5% to 6%.

Treasury Yields Rise

Treasury yields are scaling record highs after a significant rise in wage growth sparked fears of inflation and led investors to believe that the Federal Reserve will hike rates more times than anticipated.

The labor market has come a long way since the Great Recession, with wages growing at the fastest pace in January in more than eight-and-a-half years. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009. Several states have also raised wages. Minimum wage has been raised in 18 states in January, which had a positive impact on 4.5 million workers, per the Economic Policy Institute (read more: Wages See Fastest Growth Since 2009: Top 5 Gainers ).

Rise in bond yields, in the meantime, might tempt investors to take money away from equities and invest in bonds. But, Buffett cautioned that long-term bonds tend to generate less return than stocks and with rising inflation, bonds can really become a dumb investment. Needless to say, rising inflation erodes the value of the principal on fixed income securities.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Buffet Thanks New Tax Code for Big Gains

Buffett told investors that Berkshire got a lift from the new tax code. He wrote that Berkshire made a $65.3 billion net gain in 2017, which increased the per-share book value of both Class A and Class B stock by 23%. However, only $36 billion came from the company’s operations. The rest came from the new U.S. tax code, which slashed corporate taxes and in turn boosted profit margins.

The House of Representatives passed the biggest overhaul of the U.S. tax code in 30 years. The headline-grabbing move lowered the corporate tax rate from 35% to 21%, while any income brought back from overseas is taxed 8% to 15.5%, instead of the current 35% (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks ).

5 of Berkshire’s Largest Stock Holdings to Buy Now

As mentioned above, business magnate Warren Buffet prefers investing in stocks rather than bonds. And why not? Berkshire has registered big gains last year with its stock holdings totaling a solid $170.5 billion in value. Thus, investing in Berkshire's largest stock positions won’t be a bad proposition.

The table shows Berkshire’s 15 largest stock holdings.

(Source: Berkshire Hathaway 2017 Annual Letter)

We have selected five sound stocks from the table that flaunt a Zacks Rank #2 (Buy). You can see Zacks Investment Research

Written By: Zacks Investment Research