Warren Buffett is often quoted as strongly recommending that almost all investors should be putting their savings into a low-cost index fund. However, what many people don't realize is that there's an even better option right in front of them in Berkshire Hathaway (BRK.B -0.26%)
Berkshire Hathaway offers diversification
Berkshire Hathaway's class A shares trade at $192,255, but those of us with less means can purchase the class B shares for "only" $128. Berkshire is an interesting company because it's like an index itself. It's made up of various companies in disparate industries. On top of that, Warren Buffett manages Berkshire's sizable investment portfolio, which includes Coca-Cola, Wells Fargo, American Express, and IBM.
The numerous subsidiaries of Berkshire Hathaway include Geico, the automobile insurer famous for its advertisements with the talking gecko, and Fruit of the Loom, ubiquitously known for its underwear and white t-shirts. Berkshire is also home to Dairy Queen, the chain of fast-food restaurants known most for their ice cream, and NetJets, the private jet company responsible for getting wealthy people and corporate executives across the United States and to other continents.
An investment in Berkshire Hathaway has diversification built right into it -- just like the S&P 500. Just a few examples of Berkshire Hathaway's offerings include:
- Insurance for cars and boats
- Manufacturing of recreational vehicles and flooring
- Jewelry, shoes, and candy
- Transport of natural resources and manufactured goods via railcars
- Newspapers and business news portals
With Berkshire Hathaway's stock, you're essentially getting an equivalent of an index fund -- like the S&P -- with the added benefit of not having to pay any fees.
Oh, and one other thing: it's also outgained the S&P 500 by more than 250 percent.
Long-term outperformance
The performance of Berkshire's stock during the past 20 years has been truly stellar.
Currently, Berkshire trades at a discount compared to the S&P 500, so it's as good of a time as any to jump in on this long-term outperformer. Berkshire trades at a price-to-earnings multiple of 16 against the market's 18. The company also trades at half the price-to-book value of the market, 1.3 versus the market's 2.6.
An investor would be paying less for the earnings of Berkshire Hathaway and for the value of its equity compared to the market by purchasing its stock.
Can Berkshire Hathaway keep it up?
Berkshire Hathaway has grown tremendously throughout its history through the outperformance of its businesses, acquisitions, and Warren Buffett's spectacular allocation of capital.
The company has returned around 20% per year on a book value basis since 1965, compared to the market's ten percent over the same period . In 2013, Berkshire Hathaway's stock outperformed the S&P 500 by returning 32.7% compared to the S&P's 29.6%.
Although similar returns will be tough for Berkshire going forward, the company is a great representation of the American economy, and a gathering place for some of its greatest businesses. Even though Buffett promulgates the benefits of index funds for lay investors, his own company might be the best option for them.
