The Dow Jones Industrial Average has for years been the most popular bellwether by which investors measure the performance of the stock market. While the S&P 500 might be more representative of the market, tracking the 500 largest stocks in the U.S., the Dow Jones Industrial Average is more selective, representing just 30 large, blue-chip companies across the various sectors of the economy.
They are not necessarily the 30 largest. Rather, they are selected by a committee based on a variety of factors, but all are well-known, stable, and influential companies. Case in point: The seventh largest company in the world by market cap, Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%), is not in the Dow, but insurer Travelers Companies is. So, if you wanted to invest in an exchange-traded fund (ETF) that included Warren Buffett's company, you would have to look elsewhere. Or you could invest in the stock on its own.
But would you be better off buying shares of Berkshire Hathaway, or all 30 stocks in the Dow Jones Industrial Average?
Examining the Dow Jones Industrial Average
Before we examine what has made Berkshire Hathaway such a great investment over the years, let's take a look at the Dow Jones Industrial Average. Aside from its unique construction, there is another key point to know about the Dow: It is price-weighted, as opposed to market cap-weighted. So that means the biggest companies aren't always the largest positions.
Currently the three largest holdings in the Dow are UnitedHealth Group, Goldman Sachs, and Home Depot. Apple, the world's largest company, has just the 14th largest weighting in the index. The Dow has changed some 57 times over the years, with the last change coming in 2020. None of the original stocks remain, as the committee makes changes to reflect the current and future environment, based on its criteria.
Year to date (YTD), the Dow is in bear market territory, down 20.7% through Sept. 30. The S&P 500 is down 24.5%, while the Nasdaq Composite is off 32.3% YTD through Sept. 30. Over the last 10 years through the end of September, it has returned 10.6% annually, and going back 20 years it has an annualized return of 6.8%. Over the past 20 years, it has finished in negative territory for five years dating back to 2003, including this year, with its worst year in 2008 when it fell 33.8%.
Berkshire Hathaway has consistently beaten the Dow
Berkshire Hathaway is a company that needs little introduction. It is one of the largest and most influential companies in the world, run by chairman and CEO Warren Buffett. The company runs a $300 billion investment portfolio and wholly owns or has a majority stake in some 70 companies -- including retailers, insurers, financial firms, railroads, utilities, and others.
Over the years, Berkshire's stock has consistently outperformed the Dow Jones Industrial Average. In the past 20 years, it has finished the year in negative territory only four times, with its worst year in 2008, down 32.1%. This year, the stock is down about 10.6% through Sept. 30. Over that two-decade span, it has beaten the Dow in 13 of the 20 years and has posted an average annual return of 8.9%, which beats the 6.8% return of the Dow. If you go back 10 years, Berkshire Hathaway has an average annual return of 11.8% compared to the Dow's 10.6% annual return.
So, looking back on recent history, it is safe to say that Berkshire Hathaway has outperformed the Dow Jones Industrial Average. Does it remain a better buy right now?
Berkshire Hathaway is a better buy
The stock looks overvalued right now, with a price-to-earnings (P/E) ratio of 54. That is because of a net loss in the second quarter related to investment losses in the portfolio. But in reality, the company posted revenue and operating profit gains in the most recent quarter, so the market expects earnings to bounce back as it has a forward P/E of 18.
The fact is, Berkshire Hathaway, with its diversified portfolio, excellent management, and some $105 billion in cash on the sidelines, is built to weather markets like this. It typically outperforms the benchmarks during down markets, yet performs largely on par with large-cap growth stocks when the benchmarks are up.
As Buffett is 92 years old, and vice chair Charlie Munger is 98, the day will come that the company must transition to new leadership. But in reality, the transition has already started. Successors, vice chair Greg Abel and vice chair Ajit Jain, are expected to take over when Buffett steps down, and they have been groomed in the culture, philosophy, and strategy for many years.
As it has been for the past 50-plus years, Berkshire Hathaway remains the type of all-weather stock that would fit nicely as a core piece in any portfolio. The Dow Jones Industrial Average is built to be the bellwether for where the market is at any given time, but Berkshire Hathaway is built to beat the market, wherever it is at any given time.
