It’s a thing to end your blog posts with a bunch of hard-hitting questions, apparently under the guise to generate discussion. You put those bad boys in either in bold or italics (I’m helpful) because the author is serious about getting your attention, dammit. So you’ll forgive me for bolding and italicizing this next questions, but if I’m anything it’s a spineless product of peer pressure.
Why don’t index investors just buy Berkshire Hathaway?
The advantages of buying index funds have been discussed more than Jian Ghomeshi’s sex life. (WHOO STILL GOT IT) They offer instant diversification. Fees are much lower than mutual funds. Trying to beat the market is a sucker’s game that professionals can’t even do, so why should you? And so on. And for most investors, they tend to be a pretty good deal. Unless you invest with Francis Chou, you’re probably not going to do much better.
But what if there was a mutual fund that was ran by the smartest investor in history that didn’t charge you a thing to hold it? Because that’s exactly what you’re getting with Berkshire Hathaway.
Warren Buffett’s company is incredibly diversified. It has significant holdings in financials (via Berkshire’s insurance division, plus stakes in Wells Fargo and other banks), consumer staples (Coke, Proctor and Gamble), consumer discretionary, (via Dairy Queen, Nebraska Furniture Mart, Borsheims Jewelry), utilities, railroads, energy, and even tech, a sector Buffett has famously shunned. The only sector Buffett doesn’t have any exposure to is materials, especially gold. Buffett’s been pretty consistently bearish on the yellow metal over the years, so that’s not much of a surprise.
Berkshire is every bit as diversified as an index fund. But there’s more. You’re getting the active management of the greatest investor in history, and you’re getting it for nearly free. Buffett pays himself $100k per year, while Berkshire Hathaway’s market cap has approached $200 billion. That’s an annual management fee of 0.00005%, or approximately 2000x cheaper than an index fund with a management fee of 0.1%, which is as cheap as you’re going to get. And Buffett still holds a mountain of Berkshire stock, meaning he’s still just as invested as what you would be. Apparently he still regularly goes into work on Saturdays and Sundays. The dude is 84 years old.
Oh, there’s more. The S&P 500 trades at approximately 16x current earnings and 15x forward earnings. Berkshire trades at… 16.3x current earnings, and just a little under 16x forward earnings expectations. Berkshire trades at 1.48x book, which is cheaper than the S&P 500 as a whole. Oh, and Buffett is sitting on approximately 25% of the company’s market cap in cash, meaning Berkshire trades at about 12x earnings ex-cash. It’s like buying the market with a built in call option. Buffett will pull the trigger on another big acquisition. It’s only a matter of time.
The big risk in Berkshire is when Buffett takes the big dirt nap. Eventually the Oreos for breakfast will catch up to the guy. (Imagining Warren Buffett going to the store and buying a big ass pack of Oreos cracks me up) But even when he does, he’s built a culture of a bunch of independent managers doing their thing. He’s famously hands off. Berkshire might not get as many sweetheart deals when he’s not around anymore, but there’s still 50 years of deals there that he did buy up during distressed times. One thing I’ve learned about being the lender of last resort is you can get some pretty sweet deals when people are desperate for cash. Berkshire is big enough this should continue.
Berkshire is hand picked by the best investor in history. You get his expertise for a fraction of the cost of a traditional index fund. It’s cheaper than the overall market and has a cash component, which also makes it less volatile. If you’re looking for American exposure, there’s certainly a case to be made for owning it compared to the S&P 500.