If You’re a Mutual Fund Person – Why Not Berkshire Hathaway?
I was reading in the Globe and Mail recently about how Warren Buffett was buying back billions of dollars’ worth of his company’s own stock these days. For those of you that are only vaguely familiar with the Oracle of Omaha, he’s sort of seen as the most successful stock investor/stock picker of all time. He’s famous for being able to look at companies’ bank sheets and determine which ones are undervalued enough that they represent a good buying opportunity. Then he buys as much of the stock as he can get his hands on, and these days he often just buys prospective companies outright. His holding company (a name for a business that basically owns other businesses) is called Berkshire Hathaway and it has done pretty well for itself over the years. His compounded rate of return over the last 4+ decades is over 20% (surpassing the market average by a HUGE margin). This consistent growth is extraordinary in so many ways.
Luck vs Skill
Many indexing disciples (of which I proudly consider myself one of) out there believe luck has played a large part in Buffett’s success. I think this is true to some degree. I think there are many reasons why Buffett has experienced the level of success he has, and many of those reasons are advantages that the average retail consumer like myself can never hope to duplicate – but that is a whole other discussion. The bottom line here in my mind is that IF you believe someone out there can pick stocks and beat the market over time, then Buffett and his partner Charlie Munger should probably be your first two picks.
The Losses Aren’t Mutual (the Manager Doesn’t Partake)
Given that premise, why in the world would you ever invest in mutual funds? Investing in Berkshire Hathaway means that you are getting a huge management team to look after your money, but more importantly a management team headed by the most successful manager of all time, who believes so strongly in the investments he’s putting your money into that he put his own money in alongside of yours. Are you ever going to get a better guarantee than someone putting their own skin in the game?
If all of that isn’t enough for you, then consider the difference management fees will make over the long haul when it comes to your investments. I’m a big proponent of Canadians becoming more aware of MER fees and massive difference they can make in your investments over time. I’ve pointed out (to the chagrin of many investment advisors) several times the basic math behind the tens of thousands of dollars the average Canadian will likely lose in their life to mutual fund fees if that’s the vehicle they chose to primarily invest through. Just for reference-sake, I saw a commercial on an American TV channel last week that said the average American loses 155K in fees from their 401-K during their lifetime. I imagine the results would be somewhat similar here in Canada. Investing in BH takes away those pesky fees that eat away at your savings’ growth over the years.
If They’re Good Enough for Buffett…
Finally, maybe the best argument for buying Berkshire shares right now is that Warren Buffett himself is buying them. As the G&M article pointed out, Buffett is buying back shares of his own company, even though he hasn’t done so in the past – simply because he feels they are such a great value at their current stock price. The company currently has a huge pile of cash on its balance sheet and in Buffett’s own words, he is just waiting to pull the trigger on another attractive deal. Even if the old investing wizard is only half as good as he has been over the past five decades, you’ll still be getting a better deal than you would be with 98% of mutual funds out there these days!
Mr Buffett is 82 and he like to buy breakfast at McDonalds most days. I think he prefers the sausage sandwich.
He bought stock in Dairy Queen because he loves their food.
Mutual funds tend to be longer term investments. How long will the oracle continue at the helm?
He’s got people in place (he has long stated this) to run the show after he leaves. Guys that have made every decision with him the past 10 years or so, therefore, I’m not too worried. In any case, you’ll still get to benefit from the great companies he has purchased in the past.
I think you might oversimplifying things on the DQ front. WB likes to give off this folksy image, but there is no way he buys that company without poring over the finances for weeks and getting and great deal (in addition to loving the good).
I was questioning his physical longevity when I referenced DQ. He loves the food and eats there a lot.
I watched an interview with him on the CBS show Sunday Morning this past Sunday and he talked about buying a breakfast sandwich at McDonalds almost every day.
I am sure he has good people trained to run the company but you can’t teach vision, creativity or intuition.
My BIL said this week he’d seen research that what you eat after age 75 won’t affect your longevity at all. Still searching for the reference / study, but…maybe it doesn’t matter where Mr. Buffett eats ;=}
There’s just one problem with investing in Berkshire – its class A shares sell for $143,000!
Class B shares are more affordable ($95), but they come with a fraction of the voting rights.
Who needs to vote? I’ll just take the profit! Mutual funds come with zero rights last time I checked 😉
The biggest impediment is the price and he sees no reason to do stock splits. He thinks his stock price is fairly valued and he does not want to dilute the value.
I’m a big fan of Warren Buffet. His company is growing quite large though, and that’s why I think he’s buying back his own shares – and it is an easy way to give his company a quick 20% return and one more year of beating the S&P 500.
This is probably the best reason not to invest with him – he’s just so large that to move the needle now he has to make huge purchases. He has such a great track record, and gets such “sweetheart deals” though that I would hesitate to bet against anything he does these days – if only for the “halo effect”.
Great analysis. I agree with you. Much of Buffet’s success can attributed to luck. He is a very talented investor though.
Yah, the past few decades one could argue that his reputation has helped him in so many ways, but his early success as a relatively minor player is pretty impressive, even if you consider luck a factor. The thing is, could anyone have identified him back then, as opposed to all the other luck-driven guys with great 10 year records who then crash back down to Earth (or “revert to the mean” as John Bogle would say)?
I considered Berkshire in the same way – as a great mutual fund. It’s funny that he always buys when he finds value and here he is buying his own shares.
I wouldn’t buy Berkshire instead of a sector fund or ETF were I looking for a broad way to invest but I think it’s a nice position to have if you think he can replicate his past performance.
I’d love to invest in it… but the price is astronomical!
Not the Class B shares (as Robb mentioned above).
You know… I never actually thought about this. I’m going to start looking into Berkshire a bit more now