My guess for 2013 and beyond: The stock market is going higher, maybe a lot higher. There are many reasons, but this one surprises me as much as anything: I can't find any unapologetic bulls. To a person, every individual that I've talked to in recent weeks is nervous - scared about the cliff, about the resiliency of housing, about the crippling public debt, and more.
Despite the profit that's there for the taking - notwithstanding the profit that's already been made - it doesn't seem to have moved the needle: Investors continue to be scared of investing in stocks.
The happy takeaway: It's going to take years to rebuild confidence and enthusiasm for equities, to get to the level of complacency necessary to put a top on the market. In the meantime, for investors who can see through the pessimism, it's a great time to build your nest egg.
Catalyzed by a rebound in housing, an emerging energy boom, and transformational innovations in technology, the next several years should be quite good for business in America. One way to play a rebound in economic growth is my 10th and final pick for my Top Ten list for 2013: Berkshire Hathaway (NYSE:BRK.B). (Please note I am specifying the B shares.) When you invest in Berkshire, you instantly become a part-owner in an impressive portfolio of quality businesses. For conservative investors - especially for investors who have been out of the stock market and are looking to get back in - an allocation of capital to Berkshire makes a lot of sense.
It's also a pick that fits my objective, which is to exceed the S&P 500's return for a fourth consecutive time - my previous top ten lists have beaten the S&P, 97% to 27% (2009), 21% to 14% (2010), and 79% to 16% (with just a few days to go in 2012).
If you'd like to review 2013's list and my previous top ten's, here is the record.
Why you should consider Berkshire Hathaway
By now, I'm sure you know about Warren Buffett's line in the sand with respect to stock buybacks: Berkshire will consider retiring its shares when the stock price is at 120% of book value. The stock is currently trading slightly above that threshold, a floor that is sure to rise as the company harvests and re-allocates its robust free cash flow (estimated at $1 billion per month).
Implicit in setting 120% of book as a "floor" is that Buffett believes intrinsic value is much higher than 120% of book. On the issue of value, the best and most thorough presentation I've seen is available at the Tilsonfunds website, here is a link.
The stock of Berkshire probably has 50% upside from the current quote over the next two years, but that's not an important number. This is a stock you want to buy and forget about, allowing time to work its compounding magic on its growing stream of cash. You can rest comfortably knowing that you own Burlington Northern, Coca-Cola (NYSE:KO), Wells Fargo (NYSE:WFC), and American Express (NYSE:AXP). There are hidden gems in the portfolio, too, such as the option to buy 7% of Bank of America (NYSE:BAC) stock at $7.14 in 2021 - the option might be worth $10-25 billion when the time comes, depending on the performance of BAC stock.
That's not to say Buffett's portfolio is perfect. Buffett's previously expressed reluctance to invest in technology companies was set aside to buy IBM (NYSE:IBM), and my guess is he will eventually regret the move. There's no doubt that IBM is a #1 player, and quite the financial manager to boot - using free cash flow to retire stock as aggressively as any large-cap company. But the landscape in which IBM competes is changing at warp speed, and the changes do not favor IBM. Because it's vastly more efficient (and more than 90% cheaper), computing power is moving to the cloud. Until now, large companies have had to build out their own expensive computing infrastructure - akin to building their own power plant, which was immensely profitable to IBM - but the future rests on a distributed computing platform, like a centralized power plant in which you pay for what you use. It's a terrific change for users, since it's much more efficient, but it's not a good thing for IBM's hefty margins.
Don't let my analysis of IBM dissuade you from buying Berkshire, though. Even if IBM struggles, Berkshire's other stellar businesses and its rock-solid financial strength will appreciate steadily in the coming years. Buy it, tuck it away and forget about it. A few years from now, you'll be glad you did.