ETFs
Should You Buy Berkshire Hathaway or This S&P 500 ETF?
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) and the Vanguard S&P 500 ETF (NYSEMKT: VOO) are both stable long-term investments. Berkshire Hathaway, a struggling textile maker that Warren Buffett built into a massive conglomerate over the past six decades, is invested in nearly 50 stocks and ETFs. The Vanguard S&P 500 ETF, launched in 2010, passively tracks the performance of the S&P 500 index with a low expense ratio of 0.03%.
If investors simply buy these two stocks and hold them for a few decades, there’s a good chance they’ll outperform most of their peers when it comes to stock picking. But if you can only choose one, should you stick to the Oracle of Omahaor simply invest in the S&P 500?
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Reasons to Invest in Berkshire Hathaway
Over the past 10 years, Berkshire Hathaway’s stock is up 224% while the S&P 500 is up 180%. This record of consistent market performance solidifies Warren Buffett’s reputation as one of the world’s most successful investors. makes sense to most investors to simply let him choose the best actions.
By purchasing a single share of Berkshire Hathaway, investors gain instant exposure to top blue-chip stocks like Apple, Bank of America, American Express, Coca-ColaAnd ChevronIt also directly owns Geico, Gen Re and other smaller insurance companies.
Berkshire Hathaway doesn’t pay dividends, but has repurchased nearly 13% of its shares over the past decade. It also ended the first quarter of 2024 with $189 billion in cash and equivalents, still giving it plenty of room for larger buybacks and investments.
Most investors value Berkshire Hathaway based on its price-to-book ratio rather than its price-to-earnings ratio, since its earnings fluctuate from year to year based on the performance of its investments. In that regard, its price-to-book ratio of 1.6 still looks reasonable — and it should rise as its portfolio grows again in a more benign macroeconomic environment.
Reasons to invest in the S&P 500
Berkshire Hathaway may seem like an attractive alternative to the Vanguard S&P 500 ETF — until you consider three problems.
First, the popular ETF has generated a total return of 236% over the past 10 years – so investors who reinvested their dividends would have outperformed Berkshire Hathaway by about 12 percentage points.
Over the past 20 years, Berkshire Hathaway’s stock has gained 604%, while the S&P 500 has gained 383%. But when you include reinvested dividends, the S&P 500 has generated a total return of 616% and has slightly outperformed Berkshire Hathaway.
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Buffett refuses to pay a dividend because he believes it would be smarter to spend the money on new investments and buybacks. However, it could have generated a higher total return than the S&P 500 if it had simply paid a few dividends.
Another issue is Berkshire Hathaway’s heavy exposure to Apple, which makes up 43.5% of its entire investment portfolio. For reference, Apple only makes up about 6.6% of the S&P 500. If Apple loses its momentum and struggles to impress the market in the coming years, it could send Berkshire Hathaway down much more than the S&P 500.
Finally, Warren Buffett is 93 years old and should hand over the reins to his successor Greg Abel in the near future. But Greg Abel, who runs Berkshire Hathaway’s non-insurance business, is not a stock-picking specialist like Buffett. So for now, there’s no way to know whether Greg Abel will be able to maintain Buffett’s decades-long streak of beating the market.
Best Buy: Vanguard S&P 500 ETF
Warren Buffett notably left his wife, Astrid Buffett, simple instructions for managing his inheritance after his death: invest 90% in a low-cost S&P 500 index fund and the remaining 10% in short-term government bonds. Those instructions suggest that even Buffett doesn’t know what will happen to Berkshire Hathaway after he’s gone.
Yet Buffett clearly remains optimistic about the U.S. economy. Therefore, I think it makes more sense to follow Buffett’s advice to his wife and simply buy an S&P 500 index fund or ETF, automatically reinvest its dividends, and eliminate the short-term noise.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple. The Motley Fool has positions and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Should you buy Berkshire Hathaway or this S&P 500 ETF? was originally published by The Motley Fool