By Brett Arends
An allocation to energy has proved to be a very useful diversifier
Warren Buffett's magic is still at work even after he's retired as CEO.
If you need any further evidence of the wisdom of holding some energy stocks in your 401(k) and other retirement accounts, look at Berkshire Hathaway.
The megaconglomerate (BRK.A) (BRK.B), which was run by Warren Buffett until his recent retirement, has just made a quick $2 billion on its oil bets thanks to the Iran conflict.
And while that's reasonably small compared with the overall size of the company - Berkshire's net income was $67 billion last year - it's hardly meaningless. More importantly, perhaps, is that it may lower the overall risk of the company's investment portfolio.
Berkshire owns 264.9 million shares of giant U.S. oil and gas producer Occidental Petroleum (OXY), and it holds rights to purchase another 83.9 million shares within the next few years at a prearranged price.
Those bets have left Berkshire with a good cushion against the risks posed to the rest of its portfolio, including all its other stocks, by a sustained rise in oil prices.
Berkshire's bet on Occidental turns out to be a useful diversifier: It will go up even if high oil prices drive down stocks and bonds.
Even after pulling back Monday, U.S. oil prices (CL00) (CL.1) remained well above $90 a barrel, while the average retail U.S. gasoline price, as of early Wednesday, has climbed to $3.84 - a rise of nearly 90 cents in a month's time, according to AAA.
MarketWatch Live: U.S. stocks headed lower after best day in five weeks as Brent crude moves back above $100 a barrel
The bets on Occidental were taken by Buffett, now 95, before his retirement as Berkshire's CEO at the end of 2025. They produced a lot of red ink in the company's portfolio last year, as Occidental's stock slumped. (Buffett, not for the first time, proved a bad market timer when it came to buying into the energy sector, purchasing most of the Occidental stake during the previous energy crisis following Russia's invasion of Ukraine in 2022.) Berkshire also struck a deal to acquire Occidental's chemicals business late last year.
But the bet is looking a lot better right now. Occidental, unlike many other big energy companies, avoids locking in prices for its oil and gas output in advance through derivatives contracts. As a result, the stock is very heavily exposed to swings in oil and gas prices, both up and down.
That's been good news since the Israeli and the U.S. governments launched their joint attack on Iran on Feb. 28. Brent crude (BRN00), the global benchmark for oil prices, has risen by two-thirds in fewer than three weeks, from around $60 to $100-plus.
In turn, Occidental's stock price has risen as much as 12% during the first weeks of the conflict, while the S&amp;P 500 SPX has fallen 3%. The stock was up 1.4% in premarket trading on Tuesday.
The $6 gain in the Occidental share price has added about $1.6 billion to Berkshire's stake in the company, lifting its value from $13.6 billion to $15.2 billion. Berkshire also holds warrants, effectively a derivative, allowing it to buy a further 83.86 million Occidental shares at $59.62.
While the warrants are not traded, there is a market for call options on Occidental stock. The December 2028 $60 calls - allowing purchase of the stock at that price at any point up to that date - have risen from $9 to $14 in a matter of weeks. Berkshire's warrants would be worth more because they have a longer maturity, but even at these prices the company's holding would be worth $1.2 billion now - a rise of about $400 million since the start of the conflict with Iran.
The real juice here isn't what's happened so far but what might happen next. Right now, you can't move for experts explaining how oil is going to $150 a barrel, or $200 or even higher, and predicting various forms of catastrophe. Maybe they're right. Maybe they aren't. There are reasons to question the most apocalyptic forecasts.
But it's undeniable that this is at least a possibility, and that if it were to happen, it would pose a risk to the economy and to the rest of your portfolio. Energy stocks like Occidental might like $200 oil; most of the S&amp;P 500 wouldn't.
The bond market might not like it much, either. Rising oil would be inflationary, at least until it tipped the economy into recession.
As a result, Berkshire's bet on Occidental turns out to be a useful diversifier: It will go up even if high oil prices drive down stocks and bonds.
This is something that should interest ordinary investors. This isn't about short-term predictions, let alone the idea of trying to trade the Iran conflict.
But on a long-term view, analysis shows that in general, adding, say, an energy-sector fund such as the State Street Select Energy SPDR XLE to a traditional portfolio of regular stocks and bonds has dramatically lowered volatility and risk, even while actually adding (slightly) to long-term returns. Since the start of 1999, a portfolio consisting of 90% Vanguard Balanced Index Fund VBAIX and 10% XLE has beaten the balanced index fund alone by an average of four-tenths of percentage point a year. (The Vanguard fund consists of 60% U.S. stocks and 40% U.S. bonds, the classical default portfolio.) And contrary to what conventional wisdom might expect, it did so with greater reliability. It proved a better investment during the dismal 2000s, and it fell half as much as a regular 60/40 portfolio during the energy and inflation crises of 2022.
$10,000 invested in a regular balanced index fund - 60% U.S. stocks and 40% U.S. bonds - vs. 90% in a balanced index fund and 10% in the energy-sector fund XLE.
None of this means it will do so again - the past is no guarantee of the future, as the disclaimers always say. Then again, that is also true of the rest of your portfolio. There are no guarantees that stocks will outperform bonds, or even that they will beat inflation over the next 10 or even 20 years.
The only guide to the future that anyone relies on is the past. And, in those terms, an allocation to energy has proven a very useful diversifier.
-Brett Arends
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03-18-26 1138ET

Warren Buffett's Berkshire Hathaway has gained $2 billion from its investments in Occidental Petroleum amid rising oil prices due to the Iran conflict. This allocation to energy serves as a diversifier for Berkshire's portfolio, which reported a net income of $67 billion last year. Despite previous losses from Occidental's stock, the recent surge in oil prices has significantly increased the value of Berkshire's stake in the company. Experts predict further increases in oil prices, which could impact the broader economy and investment portfolios.

- The article discusses the benefits of holding energy stocks, highlighting Berkshire Hathaway's profitable oil investments amidst rising prices due to geopolitical conflicts.  
- It emphasizes that an allocation in energy can reduce portfolio volatility and risk, with historical data showing improved performance when integrating energy funds like XLE into traditional portfolios.  
- The author suggests that while past performance is no guarantee of future results, energy allocations have consistently provided effective diversification.

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Warren Buffett's parting gift to Berkshire Hathaway: a $2 billion Iran oil windfall