Berkshire Hathaway vs S&P 500: Which Is Best?

Berkshire Hathaway vs S&P 500: Warren Buffett has been an investor since he was 11-years-old. In the 80+ years since, he has mastered both the art and the science of selecting companies that have plenty of potential without being overpriced.

Buffett plays the long game. He doesn’t buy anything with the intention of making a quick profit. Instead, he chooses investments that he is comfortable holding for decades. As he once put it, “Our favorite holding period is forever.”

What’s the difference between buying Berkshire Hathaway stock and investing in a fund that matches the S&P 500 (SPY)? Does Warren Buffett’s strategy truly beat the market on a regular basis? In other words, Berkshire Hathaway vs S&P 500 – which is best?

Berkshire Hathaway Portfolio Holdings

Berkshire Hathaway is a holding company, which means it doesn’t produce goods or provide a service on its own.

Instead, it generates returns through its subsidiaries and through an ownership interest in other companies. Berkshire Hathaway owns a number of companies outright, and it has a large portfolio of stocks.

Warren Buffett took control of Berkshire Hathaway in 1965. In the years that followed, he carefully curated a portfolio of assets that built wealth for Berkshire Hathaway shareholders.

Examples include technology companies like Apple (AAPL), consumer staples like Kraft Heinz (KHC), energy giants like Occidental Petroleum (OXY), and financial services like Bank of America (BAC).

Buffett may be best-known for his long-standing position in Coca-Cola (KO). It began with a $1 billion stake in 1988 and has since returned roughly 1,800 percent to Berkshire Hathaway’s shareholders.

The entire Berkshire Hathaway stock portfolio was valued at more than $326.7 billion as of March 31, 2022, and it includes approximately 50 separate securities. That figure doesn’t cover subsidiaries like See’s Candies, Geico Insurance, and Dairy Queen.

Overall, Berkshire Hathaway Class A stock has grown more than 6,300 percent since it started trading publicly. Some years, Berkshire Hathaway outperforms the S&P 500. Other years, it falls behind.

However, over time, Warren Buffett’s strategy has proven to be far more effective than relying on the market to rise. Berkshire Hathaway stock has generated a compound annual return of just over 20 percent from 1965 to 2021. The S&P 500’s compound annual return for the same period was 10.5 percent.

When the economy is growing, the S&P tends to outshine Berkshire Hathaway, prompting naysayers to question Buffett’s methods. However, when there is a downturn in the market, Berkshire Hathaway tends to remain steady.

With each new economic cycle, Buffett proves once again that his focus on value over novelty is a reliable strategy for building long-term wealth.

Why Is Berkshire Hathaway So Successful?

Those who prefer a speculative approach to investing tend to choose unproven companies. They buy overvalued stock in unprofitable startups under the theory that the “next big thing” is coming. It’s true that this strategy can be successful from time to time, but it’s a gamble. Whether and when a growth stock might finally pay off is anyone’s guess.

Through Berkshire Hathaway, Warren Buffett focuses on quality over quantity. Each position is carefully considered, and he almost never gets in on the ground floor of a new company.

A notable exception is Buffett’s recent decision to participate in Snowflake’s IPO. The move was so out of character that it got a lot of attention, and the very fact that Buffett made the investment at all was a sign of the company’s potential.

Berkshire Hathaway has a long history of focusing on fundamentals. Buffett waits to invest until a business demonstrates that it is capable of producing profits – and it can be purchased at a reasonable price.

The S&P 500 isn’t nearly as discerning. Essentially, it tracks the ups and downs of 500 large companies that trade on US exchanges. There are no criteria around quality or profitability when it comes to getting a place in the index because the goal of the index isn’t to generate profits. The S&P 500 is neutral – it simply provides a snapshot of the market’s overall health.

What Does Warren Buffett Say About The S&P 500?

Warren Buffett knows that picking profitable stocks is a tricky business. Even with his experience and a large team of expert advisors, it’s not possible to make the right move every time. The stock market is unpredictable, and unexpected events can turn fortunes to dust overnight.

Certainly, Buffett has been more successful than most, but he doesn’t recommend that average investors attempt to emulate him. He has always advised retail investors to put their money into a low-cost S&P 500 index fund instead of attempting to trade individual securities.

Buffett’s faith in the S&P 500’s ability to deliver long-term returns is so strong that his estate plan is centered around the index. He has instructed that 90 percent of the amount his wife inherits after his death be invested in an S&P 500 index fund. Clearly, Buffett considers the S&P 500 a solid investment choice.

S&P 500 vs. Berkshire Hathaway Stock: Which Is Best?

Over time, Berkshire Hathaway has historically outperformed the S&P 500. In the last ten years, the S&P 500 returned 260 percent as compared to Berkshire Hathaway’s 300 percent.

The difference comes in Buffett’s active management of Berkshire Hathaway’s portfolio to ensure that it can withstand market downturns.

Buffett is very careful with shareholders’ funds, and his goal is to protect that wealth at all costs. During the most recent shareholder meeting, Buffett said:

We have an extreme aversion to incurring any permanent loss with your funds… The idea of losing, permanently, other people’s money, people who trust us, that’s just a future I don’t want to have… We wake up every morning and we want to be safer in terms of your eventual investment.

For long-term investors – or those that require a bit more stability than the S&P 500 can offer – Berkshire Hathaway stock is a buy.

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