Berkshire Hathaway vs S&P 500

Berkshire Hathaway vs S&P 500: While investing can be a series of gambles, with high-risk and high-reward, that style of using money to make money is much less common – regardless of whatever investing success stories would lead you to believe.

Instead, many of the most successful investments have a much longer-term focus. They leverage the power of compounding to post impressive returns and deliver a strong ROI.

As part of an income-producing portfolio, long-term investments help support consistent returns – but there are no guarantees. In fact, there are even some disadvantages to long-term investing. Make sure that you understand the pros and cons of a long-term investment horizon before you open a position.

Pros and Cons of Long-term Investing

Long-term investing, especially when coupled with a value-based approach, tends to get results. Famous money men, such as Warren Buffett, have used this approach with great success. However, you have to have the time available for a long-term investment to bear fruit.

Younger investors could find managing their own holdings more profitable than some retirement plans, but if you are getting long in the tooth, you should understand that long-term investments need time. In general, you need to be able to let your investment sit for 20 years.

You also need to put in some effort. When you open a long-term investment, you are betting that the company will be profitable or become profitable in the next 20 years and not go bust. This takes some research, a good understanding of business, and a healthy dose of luck.

Take soda companies for instance. If you bought shares in Coca-cola [NYSE: KO] 20 years ago, you could have a small fortune. However, if you invested in Richard Branson’s Virgin Cola, you’d have lost your shirt.

You will also need to be patient.

It can take many years for your long-term investment to produce a meaningful return. In that time, the economy will experience recessions, the stock will have downturns, and you may find other investments you would rather pursue. However, if you cut and run, you’ll miss out on that rebound and the power of compounding.

One strategy is to invest in an index or a company that tends to focus on long-term investments. This way, you don’t have to worry with any decision-making. You just need to ride the tide. Let’s look at two such options now: Berkshire Hathaway [NYSE: BRK.A] and the S&P 500 [SPY].

Is Berkshire Hathaway Stock a Buy?

The first thing you need to know about investing in Berkshire Hathaway is that not all its shares are priced the same. There is a class A stock [BRK.A] and a class B stock [BRK.B].  BRK.A is priced much higher than BRK.B, but it also has 1,500 times the ownership value.

Otherwise, the only difference is voting rights. Class B stock is perfectly fine for most investors and it can be an affordable way to take part in Berkshire Hathaway.

Berkshire Hathaway is basically a holding company. It owns a variety of holdings, most all of which have a long-term focus.

Warren Buffett and his team sometimes shuffle things around, buying more of one holding or selling off another, but the goal is always to get long-term gains.

Berkshire Hathaway owns stakes in the more than 80 companies including American Express, Apple, Bank of America, Coca-Cola, Fruit of the Loom, Geico, Kraft Heinz, Sirius XM, and Benjamin Moore.

Most of the company’s holdings are utilities, insurance, consumer goods, and transportation stocks. It invests in the things that people use every day with a marked preference for blue-chip stocks.

Buying stock in Berkshire Hathaway gives you the chance to benefit from a broad portfolio of strong performers, but you may need to hang on to the stock to achieve the most benefit from your investment.

You might spot a pattern in the stock selections Buffett and his team make – companies who dominate industries.

Take Sirius XM for example. It pretty much owns the market for satellite radio, produces a handsome dividend, and is unlikely to be dislodged anytime soon from its installed base in almost any car you might be these days.

Should You Invest in S&P 500?

If investing in a collection of stocks sounds good but you don’t want to commit to specific companies, you can always investment in the S&P 500.

Doing so gives you the ability to profit from the collective performance of 500 of the biggest companies in the United States. This is accomplished through index funds.

Many financial behemoths, like Schwab and Fidelity, offer their own version or a variation thereof. Alternatively, you could opt for a mutual fund that is pegged S&P. Whatever you choose, be sure to do your research. The options you have for investing in the S&P 500 can sometimes come with fees.

Further, investing in the S&P 500 as a whole is only going to give you modest returns. You will need to hold on to your investment for many years before you will see much gain.

Taking such a broad focus on your investment means that your stake will increase in value at little more than the cost of inflation.

The average annual return for the S&P 500 is around 4.5% for the past 20 years. In contrast, the average annual inflation for the same period is less than 3%.

Berkshire Hathaway vs S&P 500: The Bottom Line

Investing in Berkshire Hathaway enables you to capitalize on the expertise of Warren Buffett and his team, who guide the Berkshire ship, so to speak, and have a proven track record.

The company opens very targeted positions and they are constantly tweaking their holdings to generate a profit. Berkshire Hathaway is trying to earn its shareholders money. Buying shares in the company lets them work for you. However, putting your eggs in one basket is rarely advisable. There is likely a “Buffett premium” after all in the Berkshire share price.

In contrast, investing in the S&P 500 is much more general and less driven. There is no focus or an eye towards profit. You are merely allowing your money to move in tandem with the collective force of the largest companies. It would not be advisable to invest all your money in an S&P 500 index, but that doesn’t mean opening such a position can’t be part of your investment portfolio.


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.