As one of the most respected stock-pickers of all time, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett's favorite investment for most Americans may come as a surprise. Instead of suggesting individual stocks, or even Berkshire Hathaway itself, Buffett feels that most Americans will do well by accumulating a position in a low-cost index fund over time.

However, this is Buffett's advice for most Americans. What would be the better choice for you -- an investment in a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT:VOO), or shares of Berkshire Hathaway?

Warren Buffett speaking with reporters.

Image Source: The Motley Fool.

Don't expect Berkshire to repeat its past performance

Since Warren Buffett took control of Berkshire Hathaway in 1964, the stock has generated 20.9% annualized returns -- more than double those of the S&P 500. In fact, a $10,000 investment in Berkshire Hathaway when Buffett took over would be worth a staggering $240 million today, as compared to a respectable, but not breathtaking, $1.5 million from the same amount invested in the S&P 500.

However, Buffett has been very clear that investors should not expect the same results going forward. In his 2014 annual letter to shareholders, Buffett said that "Berkshire's long-term gains ... cannot be dramatic and will not come close to those of the past 50 years."

The problem is that Berkshire has simply become too large. As Buffett has said, "It is harder to double the market value of a $100 billion company than a $1 billion company."

In short, don't buy Berkshire because you expect Buffett and his team to make you insanely wealthy from a relatively small sum of money, in the same way they did for early Berkshire shareholders.

However, the company still has some big competitive advantages

Having said that, Buffett is confident that Berkshire can still beat the overall market over long periods of time, thanks to certain competitive advantages.

Specifically, Buffett feels that Berkshire has a key advantage when it comes to buying businesses, which is Buffett's favorite use of Berkshire's cash, by far. "We have some significant advantages in buying businesses over time. We would be the preferred purchaser for a reasonable number of private companies, and public companies as well," Buffett said at a Berkshire Hathaway annual meeting years ago.

The reason he says this is because of Berkshire's stellar reputation, as well as the company's superior financial flexibility (Buffett keeps at least $20 billion to $30 billion available at all times).

"Our checks clear. We will always have the money. People know when we make a deal, it will get done, and it will get done as fast as anybody could do it," Buffett said.

Another reason is Berkshire's hands-off management style. Buffett and Berkshire's corporate staff interfere very little, if at all, with the day-to-day operations of the company's subsidiaries. "People know they will get to run their businesses as they've run them before, if they care about that," Buffett said.

The effect of these acquisition advantages is that over time, Berkshire can acquire value-adding companies for less than their intrinsic value, and for less than competitors could acquire them for.

The advantages of a S&P 500 index fund

To be perfectly clear, Buffett will never recommend buying or selling Berkshire stock at a particular time. However, he has recommended a S&P 500 index fund, and the Vanguard version specifically, so let's take a closer look at why.

"If you accumulate a low-cost index fund over 10 years with fairly regular sums, I think you will probably do better than 90% of the people around you who take up investing at a similar time," Buffett said when asked about index fund investing at a shareholder meeting.

His logic behind this statement, and the main reason for his recommendation of the S&P 500 index fund is that, by definition, an S&P 500 index fund will match the market's performance over time. Other investment vehicles, particularly actively managed mutual funds and hedge funds, will underperform in the aggregate because of the fees they charge.

Which is the best way for you to invest?

The bottom line is that most Americans don't have the time, knowledge, and desire to thoroughly research individual stocks and make smart decisions. So, this group would do well with a passive investment that would deliver performance that's just as good as the market, and the Vanguard S&P 500 index fund has been Buffett's investment vehicle of choice, here.

However, if you prefer to take a more active approach to investing, and you believe in Berkshire Hathaway's business model, it's certainly possible, if not likely, that Berkshire stock will beat the market over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.