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The Oracle’s picks: A lesson in investing from Warren Buffett

This year began on an altogether different footing than the last, with a sector rotation into stocks that investors think will perform amid rising prices and tightening rates. Equities remain at inflated valuations, even with the sell-off seen in recent weeks.

It’s a complicated time for companies hoping to attract capital and for investors placing their next big bet. Which is why, when the Oracle of Omaha speaks, investors and companies pay attention.

What’s catching Warren Buffett’s attention these days? Turns out, it’s his old favorite, insurance.

Berkshire Hathaway’s deal to acquire Alleghany Corp for US$11.6 billion was one of the largest in the insurance sector since the aborted merger of Willis Towers Watson and Aon, which was nixed by the Biden administration. It was also Berkshire’s largest deal in years.

Speaking in his closely read annual letter, Buffett made the case for the play, saying that the insurance business is made to order for Berkshire.

“The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation,” he said.

On the shoulders of giants 

Buffett is known for his defensive stock picks, a strategy that makes all the more sense in the current environment. These are typically large, well-established businesses with steady dividends and stable earnings no matter the state of the market because of constant demand for their products and services. He also backs top-class CEOs.

Among what he refers to as Berkshire’s “four giants”—in addition to Alleghany—are Apple, BNSF Railway and BHE, its energy holding company. These are Berkshire’s largest holdings.

People still can’t get enough of Apple. The company is facing its issues, namely from supply chain shocks emanating from its production base in China, and analysts expect Mac and iPad sales to slip as consumers rein in their spending and remote working wanes. But those iPhones really are sticky and the company’s share price continues to perform, helped by the managerial prowess of Tim Cook.

Regarding BNSF, Buffett refers to the railway freight company as “the number one artery of American commerce.” The company not only carries essential goods that will remain in demand whatever the weather, but also has a strong ESG profile. If the products freighted by BNSF were moved via road, the country’s carbon emissions would soar.

Winds of change 

The same ESG profile applies to BHE, which had no wind or solar generation to speak of in 2000 and was a relatively minor player. It has since become a major utility and a leading force in wind, solar and transmission throughout much of the US.

Energy is about as sure a bet as you can get during inflationary periods. Consumer discretionary and financials have been negatively correlated with inflation every time it’s reared its head, but the opposite is true of energy. You can’t get much less discretionary. And with the energy transition to renewables still in its earliest stages, companies that have already taken the steps to deliver green production find themselves in an enviable position.

The Oracle has spoken.