The Worst Reason Not to Own Berkshire Hathaway

Is it silly to buy Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) stock? That's the opinion of one Business Insider writer.

When I clicked through, I expected to hear about Buffett's recent problems at Benjamin Moore paints. Or the fact that Berkshire Hathaway was too large to easily outperform the S&P 500 (NYSEMKT: SPY  ) , as it has done throughout history.

Instead, the article focused on Berkshire's correlation with the S&P 500 index, arguing that, because it has a correlation ratio of 0.98 to the broad market, Berkshire Hathaway is no better than owning the S&P 500. The article went so far as to call Warren Buffett, arguably the greatest investor to ever live, a "closet indexer."

Owning Berkshire is far from "silly"
The article is well thought-out, but it exemplifies everything that is wrong with modern financial thinking: It's the not-so-Foolish perspective that stocks are just ticker symbols, not ownership in a business.

When I think about Berkshire Hathaway as a business, my last thought is how it correlates to the market at large.

Instead, I think of a company that is managed by investing legends who know how to intelligently allocate capital for the best returns. I think of its insurance businesses, which have posted an underwriting profit every year for the last 10 years. Finally, I think of its stable of wide-moat businesses like BNSF, The Pampered Chef, and See's Candies that will continue to pay dividends back to Berkshire Hathaway for years and years.

Berkshire Hathaway is anything but a "closet indexer"
Berkshire is very, very big. So, naturally, it's more diversified now than it has ever been. But there are still glaring gaps in its businesses, by Buffett's design.

Berkshire Hathaway doesn't own gold mines, but there are several in the S&P 500. It doesn't own airlines, either -- only a fraction of its book value comes from NetJets, an alternative to airlines. Buffett avoided airlines for the simple reason that their entire history has created zero cumulative shareholder value. Again, the S&P 500 includes airline stocks.

Buffett has overweighted some sectors relative to the broad market. He loves the consumer companies -- Coca-Cola, Heinz, and Dairy Queen.

It's worth noting that Berkshire Hathaway should and will correlate strongly with the S&P 500, because -- even though it doesn't track the S&P 500 perfectly -- Berkshire Hathaway is a business. The stocks in the S&P 500 are businesses. And businesses that are publicly traded tend to go up and down in value together. This is hardly rocket science.

The Foolish bottom line
Saying that investors are just closet indexing by buying Berkshire Hathaway is a crazy way to look at one of the best-run conglomerates in the world.

Ultimately, the writer just wants to prove that buying Berkshire Hathaway won't necessarily make for a better diversified portfolio. This is true in the sense that Berkshire Hathaway is likely to drop when the S&P 500 drops, and rise when the S&P 500 rises. 

But to avoid Berkshire Hathaway because it is correlated to the S&P 500 has to be one of the worst reasons ever not to invest with one of the world's greatest investors.

Learn from the world's best investor
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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On October 16, 2013, at 5:52 AM, hedgefundblog wrote:

    Better? Probably. Cheaper? Definitely. SPY charges a fee. Zero cost for BRK-B and BRK-A

  • Report this Comment On October 16, 2013, at 10:23 AM, TMFValueMagnet wrote:

    Hedgefundblog,

    Well, Berkshire Hathaway shareholders do have to pay Buffett's $100,000 annual salary, but it's a pittance comparatively.

    I think I'd take a bet on BRK-A over the SPY over the next 10-20 years. The brands in Berkshire are simply better, in my view, than those in the S&P 500 index.

  • Report this Comment On October 16, 2013, at 12:05 PM, spdu4ea wrote:

    Another factor: I trust Berkshire Hathaway to reinvest would-be dividends without the tax liability -- increasing the compounding base compared to a SPY + drip

  • Report this Comment On October 16, 2013, at 5:26 PM, TMFValueMagnet wrote:

    spdu4ea - That's a really good point I wish I had brought up! And even without another shot from the elephant gun, Berkshire's commitment to buy its own shares at less than 1.2x book value will ensure solid capital allocation.

    Thanks for leaving a very insightful comment to think about.

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