Berkshire Hathaway

Regular readers know that I round out my real estate and EIUL ownership with a couple of stocks. 2 are dividend-oriented stocks. The final piece of my financial puzzle is Berkshire Hathaway. I have been buying Berkshire for over 12 years now. Thought you folks might like a little discussion on my thinking and why I collect Berkshire Hathaway.

First, for those that don’t know Berkshire is run by Warren Buffett one of the world’s richest people and generally considered the best investor of the last generation. His 47-year annual rate of return for Berkshire is over 21%. People like to think that Buffett has lost his way. Back in 2000 there was much chatter about this and again a couple of years ago. Its true the last 10 years he has not gotten anywhere near that return but remember no one else has either.

For fun let’s look at the total return for Berkshire over the last 10 years compared to a low expense highly diversified index fund from Vanguard and the S&P 500 Index before expenses are taken out.

The last 10 years BRK has returned 78.4%. The S&P 500 has returned -2.86% in that same time period. The Vanguard Total Stock Market Index Fund has returned 9.89%. Not bad for a person whom critics think has lost his edge!

The other criticism of my thinking is that I am not diversified enough. I find this laughable as I am in real estate, equities and in an EIUL tied to a stock index. But where it gets funny is when they tell me I need to own more than just Berkshire. Berkshire is a holding company that currently owns outright 52 separate companies that does everything from insurance to fractional airplanes to a railroad. Then there are 36 separate equities owned in its portfolio. The math behind diversification of a stock portfolio tells us that 95% of the benefit is achieved by owning 30 stocks. You see Berkshire owns much more than that so in itself it is well diversified. By the way, 66% of the benefit of diversification is achieved by owning just 4 stocks! Move up to 10 and you have achieved 84% of the benefit. By the way, this math works for real estate too, although Bawld Guy might have some comments about this.

So here is my thinking. Who do I want managing money for me and what will it cost me? Well, I figure I might as well have the greatest investor of the last generation. And the fact it costs me lest than a penny per year to have him do it is gravy [Buffett only pays himself a $100K salary]. Berkshire doesn’t pay dividends so that means no taxation until I sell shares.

Frankly, my only regrets at leaving behind the common investing wisdom is that I should have done it sooner!

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