1 Low-Risk Stock That Should Outperform the S&P 500, According to Warren Buffett

Warren Buffett made Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) what is today through the principles of value investing. One of the main ideas behind value investing is that a stock trading at good value (based on certain valuation metrics) will eventually outperform the overall market while also offering less downside risk than other investments.\n\nThat value investing strategy has paid off wonderfully for Berkshire and its investors. Buffett\\'s produced an average compound annual gain of 19.8% for shareholders since taking over the business in 1965. By comparison, the S&P 500 produced an average total return of 10.2% in that time. That massive outperformance stems from Buffett\\'s ability to identify great companies trading at a fair value, and sometimes an even better-than-fair value.\n\nIn his most recent letter to shareholders, Buffett suggested another stock that should perform better than the average American company, and it could turn out to be a great value stock for investors.\n\nImage source: The Motley Fool.\n\nA portfolio full of incredible businesses\n\nBuffett highlighted several of Berkshire Hathaway\\'s biggest stock holdings in his 2023 letter to shareholders published earlier this year.\n\nHe\\'s continuously bought shares of Occidental Petroleum (NYSE: OXY) since the start of 2022. He\\'s built a sizable position in the oil company, amounting to 28.8% of the shares outstanding. Berkshire also holds about $8 billion worth of preferred shares, which it received in exchange for helping finance Occidental\\'s acquisition of Anadarko in 2019. Buffett praised Occidental\\'s management and said he expects to hold the stock indefinitely.\n\nBuffett also called out longtime holdings American Express (NYSE: AXP) and Coca-Cola (NYSE: KO) as businesses he never plans to sell. Both have strong international brands that Buffett loves and core products and services that he called "timeless essentials." Despite the fact that Buffett hasn\\'t bought a single share of either company in over 20 years, they

remain two of Berkshire\\'s largest holdings.\n\nBuffett mentioned Berkshire\\'s giant stake in Apple (NASDAQ: AAPL), but only in passing. The Oracle of Omaha called Apple "a better business than any we own" at last year\\'s shareholder meeting. That said, he\\'s sold off some shares recently, purposefully taking the capital gains amid a favorable tax environment. He assured shareholders that he expects Apple to remain the largest holding in Berkshire\\'s equity portfolio for a long time during this year\\'s shareholder meeting.\n\nStory continues\n\nAll of the companies above might loo

k attractive at their current share prices. They all have very strong competitive positions and good earnings prospects that should support their current valuations. But not a single one of them is the stock Buffett says has better-than-average return potential with less downside risk. (Although in a way, all of them are.)\n\nIn fact, Berkshire Hathaway itself is the company Buffett calls out in his letter to shareholders. "After 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies," he wrote.\n\nBut it\\'s not just that Berkshire\\'s portfolio of stocks and wholly owned subsidiaries are full of great companies, the conglomerate is also well positioned to avoid financial ruin thanks to one more big holding on Berkshire\\'s balance sheet.\n\nA big insurance policy for the insurance company\n\nBerkshire has a massive equity portfolio, which is partly funded by the float from its insurance businesses. But there\\'s another side to Buffett\\'s investment portfolio for Berkshire Hathaway, and it\\'s growing extremely quickly.\n\nOver the last few years, Berkshire has seen its position in short-term Treasury bonds balloon. Buffett said he expected it to reach $200 billion by the end of the second quarter.\n\nThat massive position in cash equivalents means Berkshire "should also operate with materially less risk of permanent loss of capital," Buffett wrote. While some may deem holding that much cash as a drag on Buffett\\'s portfolio, those T-bills are yielding over 5% for Berkshire shareholders. That\\'s an excellent ballast to the equity portfolio and core operations at Berkshire.\n\nAll of it amounts to an insurance policy on the rest of Berkshire Hathaway. On top of that, it puts Buffett and his fellow portfolio managers in a position to be able to seize market opportunities if and when they present themselves. For example, Buffett was in a position to invest $10 billion in Occidental in 2019, seeing a potential opportunity. He previously made a similar deal with another top holding, Bank of America. More opportunities will surely present themselves, and Berkshire is ready for them when they do.\n\nA great company trading at a fair price\n\nIt\\'s important to note that Berkshire isn\\'t just a conglomerate full of great businesses and a massive cash pile on its bal