Berkshire Hathaway Vs Mutual Funds

Berkshire Hathaway Vs Mutual Funds: In late August 2020, Warren Buffett – the Oracle of Omaha – turned 90 years old, prompting the investment community to reflect on his achievements.

In the 55 years he has managed the holding company Berkshire Hathaway, Buffett has grown it to the sixth largest corporation in the United States. 

Investors are often curious whether Berkshire Hathaway is the right choice for their portfolios. After all, can’t the same investment goals be accomplished with mutual funds?

The short answer is sometimes, and the longer answer is that it depends on who you ask. Analysts tend to have strong opinions on the question of Berkshire Hathaway vs mutual funds. Here’s a summary of the arguments to help you decide which is the best option for meeting your financial goals. 

The Story Behind Berkshire Hathaway’s Success 

Buffett’s assets, which now top $67.5 billion according to the Forbes’ 2020 list of the world’s richest billionaires, make him the fourth wealthiest man on the planet.

However, unlike others on that list such as Jeff Bezos and Bill Gates, Buffett didn’t amass his fortune by founding a successful startup.

Instead, he took charge of a textile company with New England roots and transformed it into an extraordinary force in the marketplace. 

Under Buffett’s leadership, Berkshire Hathaway shares increased their value by 2,744,062 percent from 1964 to 2019.

Broken down annually, that’s more than 20 percent per year. The company’s success doesn’t come from chasing fads. Instead, Buffett makes thoughtful investment decisions that generate returns over time. 

In essence, Buffett buys great companies at a reasonable price, then holds onto them year after year. Examples of long-term holdings include Bank of America, Coca-Cola, Kraft Heinz, Apple, and Wells Fargo.

He also wholly owns a vast number of businesses in diverse industries from insurance to railways. Essentially Buffett likes monopolies that will continue to generate cash flow long into the future with high predictability.

For example, the cost to build a railway is prohibitive nowadays but the regulatory hurdles to build a national railway would be immense too. Buffett knows that competition from new entrants is very low once he controls one of the few national railways and can confidently build out a case for future economics.

However, when it is clear that a business is likely to experience long-term decline, he sells – and that move makes the market sit up and take notice. 

For example, in May 2020, Berkshire Hathaway sold its $4 billion stake in the airline industry, which prompted many others to do the same.

The impacted airline stocks hit 52-week lows that month, surpassing the lows that came with the March 2020 market crash. 

Pros of Berkshire Hathaway Vs Mutual Funds

Aside from Warren Buffett’s extraordinary talent as an investor, there are several important advantages that an investment in Berkshire Hathaway has over traditional mutual funds.

First, the cost of owning Berkshire Hathaway is far lower than comparable mutual fund shares. While mutual funds carry fees of one percent or more, Berkshire Hathaway spends very little on administration. 

Second, owning shares in Berkshire Hathaway exposes you to a diverse mix of industries and a broad array of companies within those industries. Berkshire has a number of wholly-owned subsidiaries, including Dairy Queen and Geico, and it has significant stakes in many more.

Mutual funds don’t have the same flexibility in investment options. Berkshire Hathaway is like having a carefully planned portfolio rolled up into a single share, without the research and evaluation required to create such a portfolio independently. 

Third, a Berkshire Hathaway investment is easier to manage from a tax perspective. The company doesn’t currently pay dividends, which means no tax liability until shares are sold. That offers investors far more control over when to pay taxes and how much is ultimately owed. 

Why Mutual Funds Are Better Than Berkshire

Some investors are concerned that Berkshire Hathaway’s success is entirely due to the efforts of one man. Since Warren Buffett is now 90, it’s likely he won’t be running the company much longer.

If you aren’t confident that Berkshire Hathaway will continue to deliver strong returns under different leadership, you may prefer to invest in an actively managed mutual fund. 

A second reason some investors prefer mutual funds over shares of Berkshire Hathaway is the pricing structure. Buying Berkshire Hathaway or any other stock is a matter of balancing the price buyers are willing to pay with what sellers are willing to accept. Mutual funds shares, on the other hand, represent a defined portion of the fund’s total assets.

These prices are updated every day based on the value of the mutual fund’s holdings. That changes the types of investments that a mutual fund can make. 

Finally, mutual funds operate by certain rules as outlined in the prospectus. They may focus on particular industries, geographies, or types of companies, and you can count on your investment staying true to that strategy.

Berkshire Hathaway isn’t bound to the same sort of limits, and the company is essentially free to buy and sell just about any sort of asset. If you aren’t comfortable with that, a mutual fund will be a better option.

Is It Better to Own Berkshire or Mutual Funds?

The decision between buying into Berkshire Hathaway or purchasing shares in a mutual fund really depends on your personal investment interests and your financial goals.

If you want to focus your investment in a particular industry or type of company, a mutual fund is the best choice.

However, if your primary goal is to grow your wealth, saving on fees and putting your faith in Warren Buffett is likely to deliver more impressive returns. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.