Please ensure Javascript is enabled for purposes of website accessibility

Warren Buffett and Charlie Munger Disagree on This Piece of Investment Advice

By Matthew Frankel, CFP® – May 28, 2017 at 8:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Munger wants his heirs to invest in Berkshire, and Buffett doesn't. Here's why.

Berkshire Hathaway (BRK.A 0.35%) (BRK.B 0.40%) CEO Warren Buffett doesn't think his wife should invest in Berkshire stock after he's gone, which may come as a surprise given Berkshire's track record and Buffett's own optimism for the company after he's gone. Charlie Munger, Buffett's right-hand man, disagrees. He thinks Berkshire will put his heirs in the best position to grow their inheritance going forward.

Why do they disagree, and who is right?

Warren Buffett wants his wife to keep it simple

Warren Buffett has said several times that the best investment most people can make is in a low-cost S&P 500 index fund, and he even bet $500,000 that such a fund would beat a portfolio of hedge funds over a decade, a bet he handily won.

Warren Buffett at Berkshire Hathaway's annual meeting.

Image source: The Motley Fool.

However, at Berkshire's recent annual meeting, Buffett was asked why he advised his own wife to invest in index funds after his death, as opposed to Berkshire shares. It's a good question -- after all, Buffett has said many times that he feels Berkshire will continue to outperform the market over long time periods. So why wouldn't he want his wife to benefit from that?

Buffett responded that his wife won't need to beat the market. "She's going to have more money than she needs," Buffett replied. He went on to say that index funds are the best investment for people who don't want to worry about their investments. He also noted that every single one of his own Berkshire shares is going to be given to charity, so that's why his wife won't inherit any of his stock.

Basically, Buffett feels that most people, his wife included, do not have the time, desire, and/or knowledge required to efficiently choose their own stocks. And he believes that actively managed investment funds, particularly hedge funds, are more likely to underperform the market than beat it. By advising his wife to invest in index funds and leave them alone, he feels he's protecting her from those who don't necessarily have her best interests at heart.

Charlie Munger thinks Berkshire still has plenty of good years ahead

Buffett's right-hand man disagrees. Munger wants his heirs to hold on to their Berkshire shares, as he wants them to profit from what he perceives as the higher upside potential they would get from Berkshire.

It's easy to understand why he feels this way. Berkshire has more than 60 businesses that generate tons of cash, and Berkshire's team (not just Buffett and Munger) has proved its ability to identify value-adding acquisitions and stock investments that Berkshire can purchase for less than their intrinsic value. Combined with the fact that Berkshire maintains a rock-solid balance sheet and doesn't expose itself to virtually any long-term risk factors, and it's tough to imagine that Berkshire won't enjoy decades of strong performance ahead.

Who's right?

Buffett and Munger both make some excellent points, and neither man's advice to his heirs is in direct contradiction to the other's. For example, by owning Berkshire shares, Munger's heirs won't have to worry about the investment fees Buffett is trying to protect his wife from. And an S&P 500 index fund has some of the same defensive attributes of Berkshire, such as diversification.

The bottom line is that there's good advice in both Buffett and Munger's wishes for their heirs. The basic difference comes down to what's more important to each -- years of worry-free investing, or the potential to make more money. 

Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
BRK.A
$478,675.55 (0.35%) $1,655.56
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
BRK.B
$317.43 (0.40%) $1.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.