How I’m Beating The S&P 500 This Year

This year has been a struggle for every investor. The S&P 500 is down 10% year to date (through Aug. 16, 2022). The tech heavy NASDAQ is down 17% YTD and the Dow Jones Industrial Average is down 6.6% YTD.

My portfolio was up 20% last year, and up another 7% through March 30, but now I’m up just 0.02% year to date, essentially break even for the year. I’m beating the performance of the S&P 500 this year using an unusual strategy. My portfolio consists of 34% Berkshire Hathaway (BRK.A, BRK.B), 28.3% S&P 500 exchange-traded funds (“ETFs”), 32% individual stocks, and 5% bonds. My portfolio is light on tech, only 3.76% of the entire portfolio. Instead, I focus on consumer defensive stocks like snack, soda and candy companies, utilities and railroads.

Normally, I don’t beat the S&P 500. My portfolio has averaged 11.57% annual returns since Jan. 1, 2009, according to a performance report from Charles Schwab. I lag the 14.5% annual returns of the S&P 500 over the past 10 years, but I have less volatility than the index. My risk is 11.07% standard deviation over the past 10 years while my returns are 11.57%, according to Schwab’s performance report. That is my alpha.

I started investing in Berkshire Hathaway in the original IPO of Class B shares on May 9, 1996, with the purchase of four shares through Charles Schwab. I kept my original shares and added to the position over the years. Critics may say I am overweight a single stock in my portfolio. That is true. However I consider Berkshire’s diversified assets — railroad, insurance, energy, retail, manufacturing, plus a large stock portfolio — far superior to even some of the most well-rounded mutual funds yet with the flexibility of deploying up to $100 billion into the market when stocks are a buy.

Recent financial reports from Berkshire Hathaway indicate Warren Buffett and his team of investors invested more capital in the first half of the year. Buffett was buying aggressively when others were fleeing the market over worries about inflation and the potential for a recession. When the stock market crashed further in June 2022, I was buying right along with Buffett.

My 28% position in S&P 500 ETFs can be broken down into the following:

• 17.39% in ProShares S&P 500 Dividend Aristocrat ETF (NOBL). I like NOBL because of its focus on dividend-paying stocks. The ETF is down just 3% YTD and its yield is 1.96%.
• 9.75% in SPDR S&P 500 ETF (SPY);
• 0.71% in iShares S&P 500 Growth ETF (IVW);
• 0.46% in iShares Core S&P 500 ETF (IVV).

I like the S&P 500 better than the Dow Jones Industrial and the NASDAQ. The S&P 500 is the standard by which large cap mutual funds are measured and most investors cannot beat the index so we might as well own it. However, you can’t build an equity portfolio with SPY alone. My portfolio is doing better than the index this year because of the performance of BRK.B and my collection of consumer defensive and value stocks. Value stocks became the go-to stocks after tech had run its course in 2021-22.

My individual stocks are in the following areas: 9% railroads with the largest holdings Union Pacific (UNP), Norfolk Southern (NSC); 3.7% tech (Apple, Google and Microsoft), and 19.46% consumer defensive stocks.

Below are my consumer defensive names with their percentage weighting in my portfolio:

• PepsiCo (PEP) at 4.75%
• Coca-Cola (KO) at 3.73%
• Hershey (HSY) at 2.49%
• Church & Dwight (CHD) at 1.89%
• Tootsie Roll (TR) at 0.23%
• Evergy (EVRG) 3.55%
• Casey’s (CASY) 0.27%
• Visa (V) 2.41%
• Home Depot (HD) ) 0.14%

You can see that I have tiny positions in Home Depot, Tootsie Roll and Casey’s. I usually enter a position by dipping my toes in the water, with a small purchase of $700 to $1,500 worth of stock. If I like what is happening with the company and I get a chance to pick up shares at a discount, I buy more. That is how my Visa position grew into a much larger position. I originally purchased 10 shares at $155.36 per share on April 1, 2020. As dividends flowed into my account, I picked up more shares of Visa. I most recently bought Visa at $195.23 per share. I figure it’s a buy below $200, but has recently climbed above $215 per share. I also want to buy more Tootsie Roll below $32 per share. I recently bought Home Depot at $301 per share.

In my early days of investing in the 1990s, I paid up to $35 in commissions per trade over the phone. So it didn’t make sense to buy stocks, unless I was buying more than $1,000 worth of stock. Now you can buy stock without commissions, making it possible to buy just one or two shares at a time. I might make 10 or 20 buys before I fill a position now.

My other strategy is my 7% loss rule. I sell the stock if it drops below 7% of my cost basis, unless the general market is also down 7% or my stock’s sector is down 7%. Then I might consider buying more or holding, depending on the metrics of the company.

I tend to sell my losers and buy more of my winners. If I can’t find anything to buy, I put the money into the S&P 500 or sit on cash.

A lifetime of investing in stocks has taught me to be conservative, buy only truly great companies with decent profit margins. Hershey’s net profit margin is 15%, Union Pacific’s is 29%. These margins are hard to beat and give the company a degree of safety when expenses increase during times of inflation like now. In addition, companies like Union Pacific and Hershey can raise prices without losing customers.

Risks

Because value stocks gained in popularity in 2021-22, it’s possible they may fall out of popularity in favor of growth and tech stocks. I’ve seen this happen before. In 2013, growth stocks outperformed value, but nevertheless value stocks did make gains that year, and I made a decent return. When the stock market crashed in 2020, I suffered a 35% loss from top to bottom, yet recovered by the end of the year to notch a 3% gain for 2020. Growth stocks, however, did much better.

Berkshire Hathaway will likely suffer big losses after Warren Buffett dies (and he will surely die some day although I’ve heard no negative reports about his health), but I do not plan on selling the stock because the company has great assets and good leadership. Apple stock fell initially after Steve Jobs died in 2011, but has posted 23% annual returns since then. For many years Berkshire Hathaway has posted 20% annual returns. We may not see that rate of return, but I believe 11.5% annual returns are just fine. At 11.5% rate of return, my portfolio will double in value every 6.2 years.

Conclusion

My unusual portfolio might not be for everybody. Critics will lambast me for owning too much BRK.B. But I believe BRK.B’s assets will hold their value over the years. Owning one third BRK.B, one-third S&P 500 and one third consumer defensive stocks does not eliminate risk, but I believe this trifecta of investments will offer balance and reduce risk compared to portfolios overweight in tech and small caps.