4 Reasons to Buy Berkshire Instead of a Mutual Fund, And Buffett Ain’t One Of Them!

images.jpegLast week I wrote about not blowing all the money you save from frugal living. In that post I introduced “Buying the B Share,” my goal of buying a B share of Berkshire Hathaway using nothing but money I earn or save through frugal living. The B share trades at about $4,000 per share (note, since writing this article, the B share was split 50 to 1), so I set up a substantial goal for myself. What I didn’t explain is why I’ve chosen a B share of Berkshire Hathaway as my goal. Here is my explanation.

It’s Not About Buffett

Under Warren Buffett’s leadership, Berkshire Hathaway has enjoyed a book value annual return of over 25%! It is for this reason that Warren Buffutt is a household name. But Buffett won’t be around for ever. The day will come when he retires to that great big bargain in the sky, and then we’ll all have a very big question to answer–Is Berkshire Hathaway still worth owning. My guess is that many will answer “No,” and the price of BRK will decline. It will be at this point, no doubt, that Buffett will be going crazy just wishing he could still buy an A share or two (currently trading at about $190,000 per share). And so anybody considering an investment in Berkshire Hathaway had better be able to justify the investment decision in a world without Mr. Buffett.

And that’s exactly what I’ve done. My analysis, however, doesn’t dive into the financial statements or evaluate the stocks Berkshire owns. Rather, my investing decision is based on the view that Berkshire is a great alternative to a mutual fund. There’s nothing new in equating Berkshire to a mutual fund, but I think Berkshire has at least four distinct advantages over most funds:

Low Cost

Mutual funds are expensive. Many cost more than 1% per year, and even the large index funds cost about 10 basis points or more. Berkshire’s costs are, for all practical purposes, zero. Yes Buffet gets a modest salary, and Berkshire spends about $6 million on administrative costs. But $6 million to manage a $100 billion firm is, well, zero.

Tax Efficiency

Taxes are killing my non-retirement mutual fund investments. Because Berkshire doesn’t pay dividends, there are no tax consequences unless and until I chose to sell. And even if the day comes when Buffett authorizes a dividend (which will happen), I still have complete control over when I pay capital gains taxes.

Diversification

Berkshire Hathaway is a wonderfully diverse company. It owns equities in a wide range of industries, including such companies as The Washington Post, Coca-Cola, American Express and Lowes. In addition to equities, Berkshire has a number of wholly owned subsidiaries, most notably in the insurance industry. Thus, a single share of Berkshire, like a mutual fund, provides exposure to many companies and industries.

Greater Flexibility

For me, this is the most important point. A mutual fund manager has to chose which public companies he or she thinks will best perform. Berkshire is not so limited. It can invest not only in public companies, but it also can and does buy private concerns, too. Thus, when Buffett is looking for a bargain, he’s not limited to Wall Street. And given the price of shares lately, some of the best bargains won’t be trading on the big board.

So those are my reasons for choosing a B share of Berkshire as my savings goal. My question for you is whether you’d buy (or hold) Berkshire without Warren Buffett at the wheel?

Here’s some additional reading on Warren Buffett:

Published or Updated: April 26, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Jon says:

    That’s a great idea, although I have one question. Since Berkshire is a corporation, it pays income tax on profits from its investments. My question is does it make more sense for you as an investor to let a corporation pay the tax at a fairly high rate, or for you to pay the tax yourself (via mutual funds) at a potentially lower rate (assuming you’re a small-time investor)?

  2. ChristianPF says:

    Dough,
    I am in complete agreement with you – Everything warren does is with a “long term” thinking – so, I really believe that he has berkshire set on a good path for the long-term (whether he is around or not) -as long as a fool doesn’t take over the company – I think berkshire will be a good investment for a while after warren is gone…

    I plan on buying it up when he retires or dies – cause like you said, the price will drop, probably immensely – but for now, I am happy to own .47 B-shares of Berkshire (I am working my way up to 1 share as well) :)

  3. Pinyo says:

    I was considering this years and years ago when the B share was still around $2k-ish. Now you just gave me 4 good reasons to buy one.

  4. Dan says:

    Jon,
    Rather late to the party, but since your mutual fund alternative is investing in other corporate entities, they pay taxes too. The author’s point is that you get the benfit of a diverse mutual fund without the added layer of complexity and cost of the fund administraton. Which, btw, is something Buffett himself has railed against as bleeding money out of investor’s profits.

  5. thomas says:

    I’m guessing that costs will increase when Buffett is gone because not everyone is going to take such a low salary.

    either way, it’s a great way to diversify safely.

    • DR says:

      Thomas, that’s an interesting perspective. As a percentage of book value, even if corporate salaries doubled, the costs would still be minuscule.

  6. AdSalesPretendingToBeBlogs says:

    Why don’t you just call your blog “Pimping the Berkshire Hathaway Fund” and be done with it?

    • DR says:

      AdSalesPretendingToBeBlogs, why don’t you submit a substantive comment with reasons why you think Berkshire is a bad investment?

  7. Dustin says:

    DR it would be great to speak with you one on one if you get a moment of spare time, drop me a line.

  8. steven says:

    Hi… It’s a great tips! I like this post very much… Thanks for sharing this information with us…

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