Whenever Warren Buffett speaks, everyone listens. That's the kind of leverage you have when you're known as the "Oracle of Omaha." Buffett has particularly generated headlines recently because of his professed bullishness towards Apple Inc . (NASDAQ: AAPL ). But does that mean you should head out and buy Berkshire Hathaway Inc. Class B (NYSE: BRK.B )? After all, Berkshire stock has a particular appeal.
On surface level, the strategy makes perfect sense. Making a position in Berkshire stock isn't going to make you rich right away. But just like the equity share, that's just not Buffett's style. With BRB.B stock, you get exposure to the top names in the markets. Moreover, you have the confidence that you're (sort of) investing with the one of the best minds in business.
However, the association with the Oracle only produces small benefits over buying the vanilla exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA: SPY ). In some cases, it's better just to go with the SPY rather than Berkshire Hathaway stock. What goes under the Berkshire umbrella is ultimately a centralized decision, and humans, even the Oracle, make mistakes.
For instance, since its market introduction in 1996, BRK.B stock averages 12.3% annual returns. The SPY over the same timeframe averages 9.5%. Granted, Berkshire stock obviously has the better performance, but it's not that much better. Additionally, investors that want a little extra kick can find juicier alternatives.
The case for BRK.B weakens when you consider recent performance.
Warren Buffett's Motivations Aren't Necessarily Yours
InvestorPlace contributor and McDonald's Corporation (NYSE: MCD ) connoisseur Will Ashworth had an interesting take on Berkshire stock. About the prospects of the Oracle buying his own stock , Ashworth wrote:
"Is Warren Buffett Buying?
No, he's not.
The man is 87 years old. Any transactions he's making are to convert Class A (NYSE: BRK.A ) shares to Class B shares in order to donate them to his charitable causes.
Buffett's most recent transaction came last July when he converted 12,500 Class A shares to 18.75 million Class B shares. He then donated 14.22 million of the Class B shares to the Bill and Melinda Gates Foundation; another 1.42 million to the Susan Thompson Buffett Foundation; and just less than a million shares each to another three charities, including his son Howard's foundation."
Another way to look at this is that Buffett, at 87 years, likely has different motivations than you.
At his annual corporate meeting, Buffett spoke glowingly about Apple. However, it wasn't the technology element that attracted him. Rather, he made "certain conclusions about both the intelligence with the capital they deploy , but more important the value of their ecosystem and how permanent that ecosystem could be."
Buffett further went on to state that "I'm delighted to see them repurchasing shares." Of course he is. His thesis is that Apple doesn't have great acquisition options between the $50 billion to $200 billion range. Thus, a share buyback is the best course of action.
By logical extension, a buyback is a freebie for Buffett. He stated, "I love the idea of having our 5% grow to 6 or 7% without us laying out a dime."
Buy Berkshire Stock with Realistic Expectations
I have nothing against Berkshire stock. As a hedge against market volatility, and as a steady performer, it does its job well. What I intended to do here was to demystify BRK.B.
In terms of annual returns, Berkshire is a slightly souped-up benchmark ETF; think a Porsche 911 with an aftermarket air-intake system. It'll give you a little pop, and perhaps a slightly meatier exhaust tone, but not much else.
Year-to-date, BRK.B shares are just below parity. In contrast, the SPY is up over 2%. That's not something to write home about, but it tells you that Berkshire isn't as automatic as you might initially think it is.
Again, I'm not trying to dissuade you. Berkshire stock in and of itself doesn't generate much excitement, which is good for certain investors. But even here, its steady hand may be getting ever so slightly less.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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