Berkshire Hathaway (BRK.A 0.24%)(BRK.B 0.38%) has been one of the best investments in history over the long term. After many decades, shares have increased in value by roughly 20% per year. At that rate with that much time, even small investments have turned into huge sums.
Think it's too late to jump in? Think again. Right now, there are two compelling reasons to add Berkshire Hathaway to your portfolio. The second reason might surprise you.
NYSE: BRK.B
Key Data Points
1. Berkshire Hathaway is a free ETF
Most investors -- even those who buy individual stocks -- own some mutual funds, index funds, or exchange-traded funds (ETFs). These vehicles can provide benefits of broad diversification, either through active or passive investment strategies.
There is a large range of potential funds, and the ease and comfort of knowing that your money is being automatically invested for you is a big plus versus doing your own research and portfolio management.
There's one big downside, however. These funds cost money to operate -- costs that are then passed on to investors typically in the form of an expense ratio. These can range anywhere from 0.01% to 2% annually or more. No matter the fee, however, they put a small to large dent in your potential earnings.
Many expenses are involved in running Berkshire Hathaway that investors are indirectly paying for, but there is no explicit expense ratio. And because the company has major interests in a wide variety of industries spanning the globe -- both through partly and wholly owned stakes -- Berkshire Hathaway itself acts as a sort of market index.
Except that instead of the index including a bunch of passively selected businesses, this portfolio is managed by one of the best investors of all time: Warren Buffett.
In a nutshell, buying Berkshire Hathaway is nearly akin to buying a broad market index fund, except there's no expense ratio and the underlying holdings are curated by a legendary investor and his handpicked team. If you're considering putting money into an index fund, consider instead simply buying some Berkshire stock.
2. Its shares could outperform if this happens
According to recent filings, Berkshire Hathaway now has a record-breaking $325 billion cash hoard -- nearly one-third of its entire market capitalization!
There may be several reasons for this, but a pricey market, at least according to traditional valuation metrics, is likely a major one for this cash pile. The market's price-to-earnings ratio recently topped 30 -- 67% above historical averages.
This isn't to say that Buffett is trying to time the market. His cash hoard is likely just a reflection of his inability to find attractive uses for it.
That much idle money has been a drag on Berkshire's performance, but it could soon prove a blessing in disguise. If markets fall, Berkshire's valuation will be insulated somewhat. Plus, Buffett would then theoretically be able to deploy that cash at attractive prices. Keep in mind that during bear markets, most investors don't find themselves with a ton of excess money.
No one knows where markets will head next, but Berkshire Hathaway is undeniably well-positioned. Whether you're interested in the stock as a "free" ETF or a market hedge, there continues to be plenty of reasons to keep loading up on its shares.
