Is Berkshire or S&P500 better? Choose the ultimate passive investment vehicle

Passive investments are very popular among investors. As a rule, they use ETFs - and especially the S&P 500 index - in which they simply invest and don't worry about anything else. But there are voices that argue that there are even better alternatives for exactly this purpose.

That alternative is legendary investor Warren Buffett's Berkshire Hathaway $BRK-B+0.8%. Where does it stand in its performance relative to the index? Is it a better choice for investors?

Here's how Berkshire performs against the S&P 500 Index

But first, let's take a look at the two options individually.

S&P 500

The S&P 500 is one of the most well-known and widely followed indexes of large U.S. companies. It is compiled by the ratings agency Standard & Poor's and includes the 500 largest publicly traded corporations in the US. It represents approximately 80% of the total market capitalisation of the US stock market.

It is a broadly diversified index, covering all major sectors of the economy - technology, healthcare, finance, media, etc. Its development is monitored by investors as an indicator of the overall state of the US economy. Growth in the index means growth in the economy.

The S&P 500 has been around for decades, with a history dating back to the 1950s. It has averaged around 10% annual appreciation, beating inflation. The index has therefore made investors money over the long term.

The index is the basis for passive investing. There are index funds that try to track its performance. These funds have low fees and are fully transparent. They are considered safe investments because of diversification, but historically outperform actively managed funds.

Berkshire Hathaway $BRK-B+0.8%

Berkshire Hathaway is an investment holding company run by legendary investors Warren Buffett and Charlie Munger. It is worth over $720 billion and is the sixth most valuable company in the world.

Berkshire owns stakes in dozens of American companies such as Coca-Cola, American Express, Bank of America and Kraft Heinz. It holds more than 90% of several companies that are part of Berkshire, such as GEICO and Dairy Queen.

Warren Buffett is known for his investment philosophy of finding undervalued companies with long-term growth potential, which he then holds for a very long time. He takes a rather conservative approach. Berkshire's investments consist of two main components - shares in other companies and profitable operations owned directly by Berkshire. Berkshire's profits come mainly from the valuation of these investments, mainly due to the increase in the market price of the shares it holds.

Berkshire has large reserves of cash, which it uses to buy undervalued companies during market downturns. A major strength is the reputation and experience of Warren Buffett and Charlie Munger, who have been around for decades. Berkshire allows them to control a lot of asset value and invest it for the long term with little shareholder pressure for short-term results.

Which is better?

If you're looking for lower risk, greater historical certainty and more diversification, then the index. But Berkshire is better suited for a specific group of investors...even if it also struggles.

Buffett is in a difficult situation. He has too much cash that he can't spend. He's dealing with so much money, it's just tying his hands.

And the problem, or rather the risk, is Warren Buffett himself. From the very beginning, Berkshire has stood on him. On his leadership, on his oversight. While there is talk that management and his successor are of equal quality, the risk of bankruptcy after his departure is still very real. The history of the S&P 500 suggests that nothing will change in the long term.

So if you are looking for a potentially more profitable investment, then Berkshire may be a better choice. But if you're looking for as much certainty as possible, then an investment through an index ETF is probably a better bet. As it is with investments, it's a quid pro quo.

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

Read the full article for free?
Go ahead 👇

Do you have an account? Then log in . Or create a new one .

I would be very happy if the cash that BRK is holding would stop being taken as a negative. The first thing I would focus on is the cash/asset ratio and that ratio is usually quite correlated, so don't just take the nominal amount (which also decreases with inflation).

Ignoring the fact that it's not holding somewhere under a straw man, but is currently making about 5%, they are holding a small share because of what their business is based on, and that's insurance companies. They have to hold on to some of that money to pay the insurance. If they have a problem with spending, it is only because all the quality companies they know are overpriced and that is definitely not a positive for SPY. There are simply stacking companies according to the marketcap and it grows thanks to about 1/3 of the companies, which are usually expensive and then BRK puts them on bread in a major crisis.

Another thing that is usually never mentioned in connection with the sp500 is what happens if a company drops out of the index? The value of the index doesn't change because another company just gets in? Is there no depreciation or other costs associated with this? (legal, transaction, etc.). I would be quite interested to know how many companies have dropped out of the index since BRK.B has been publicly traded, I would not be surprised if more than half of the companies are no longer there.

I wouldn't worry about Berkshire even after Buffett's demise. I don't think the company will change or make any other moves, Mr. Abel is very capable.

Timeline Tracker Overview