Want to Beat S&P 500 ETFs? Follow Warren Buffett's Strategy

After nearly six decades at the helm, Warren Buffett has announced that he will step down as CEO of Berkshire Hathaway (BRK.A, BRK.B). The legendary investor made the announcement during Berkshire’s 60th annual shareholders meeting, marking the end of an era that saw unprecedented returns and market-defying performance.

Unparalleled Stock Market Performance

Since Buffett took control of Berkshire Hathaway in 1965, the company's stock has returned a staggering 5,502,284% through 2024. By comparison, the S&P 500, including dividends, delivered a return of 39,054% over the same period, as quoted on Yahoo Finance.

• Compound Annual Growth Rate (CAGR) for Berkshire Hathaway: 19.9%
• S&P 500: 10.4%

Much of Berkshire’s early gains came within the first 20 years of Buffett's leadership. However, the company has consistently displayed resilience, outperforming the broader market during downturns. Notably, in 13 years when the S&P 500 ended in the red, Berkshire shares fell more than the index in only two of them, as quoted on the above-mentioned Yahoo Finance article.

Here’s how it became possible.

Play the Long Game

Buffett emphasized the importance of being selective and patient with investments as a core part of Berkshire’s long-term success.

In this regard, with modern civilization leaning toward a tech-boom, investors may choose to stay invested in the sector despite changes in interest rates, trade policies, or other temporary risks.

Notably, the core of the technological boom—semiconductors—has outperformed the S&P 500 over the past decade. The Invesco Semiconductors ETF PSI gained 462% during that time, significantly outpacing the SPDR S&P 500 ETF SPY, which rose 217%.

Another semiconductor ETF VanEck Semiconductor ETF SMH has offered 217.5% returns over the past five years against 92.7% gains noticed in SPY. This says that although SMH is off 11% this year, long-term investors shouldn’t be scared about occasional risks. They should think about the inherent potential of their investments.

Importance of Cash Balance

At the shareholder meeting, Buffett addressed the company’s record-high cash reserves, which stood at $347.7 billion at the end of Q1 2024.  He cautioned against making investments merely to reduce the cash pile. "That would be the dumbest thing in the world to invest in that manner."

Berkshire is on the search for investments that make sense to the company and offer good value. It means that if an asset isn’t investment-worthy, there's no reason to use your cash pile just for the sake of spending it.

Investors thus can play the cash-like ETF JPMorgan Ultra-Short Income ETF JPST in uncertain investing times or when value is hard to find elsewhere. The JPST ETF is up 0.1% this year and yields 4.91% annually. It charges 18 bps in fees.

Adapt Your Philosophy, Not Your Goals

“If it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy,” Buffett said. He emphasized that the world won’t change to suit your investments—you need to adapt to it.

As the world increasingly shifts toward AI, cloud computing, and cybersecurity, investors may consider adjusting their investment strategies to align with these emerging trends. Global X Cybersecurity ETF BUG, Themes Cloud Computing ETF CLOD and Global X Robotics and Artificial Intelligence ETF BOTZ could be bought on this new market trend.

Not only this, with the emerging trend of manufacturing reshoring, investors can consider the ETF First Trust RBA Amer Industrial Renaissance ETF AIRR. The ETF tracks small and mid-cap US companies in the industrial and community banking sectors., focusing on revitalization in the sector. The AIRR ETF beat the S&P 500 over the past five-year and 10-year period.

Over the past five years, the AIRR ETF has returned 238.6%, outperforming 92.7% gain in SPY. Over the past 10 years, AIRR is up 299%, compared to a 217% increase in SPY.

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This article originally published on Zacks Investment Research (zacks.com).

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