Billionaire investor Warren Buffett says most people should invest in a diversified index, like the FTSE 100 or the S&P 500, instead of individual stocks. But there are three reasons I don’t do this.
I don’t think this is a bad plan. But its financial strength, subsidiaries, and structure are why I prefer buying shares in Berkshire Hathaway (NYSE:BRK.B) – Buffett’s company.
Balance sheet
I usually view it as a bad sign when stock analysis starts with the amount of cash on a company’s balance sheet. It’s often a sign there isn’t much else that’s good to say about it.
With Berkshire though, that isn’t the case. The firm has around $335bn in cash (and cash equivalents) and I think this is a genuine reason to prefer it over the FTSE 100 or the S&P 500.
If something rocks the entire stock market, Buffett’s company is likely to be relatively resilient. In fact, these have been the opportunities that have made the firm such a success to date.
There is a downside to holding this much cash – it weighs on short-term returns. But I think being in a stronger financial position than other firms is a long-term advantage for Berkshire.
Quality
Index funds generally tend to contain at least some stocks I don’t want to invest in. From the FTSE 100, Imperial Brands is a good example. I suspect demand for the company’s products is likely to fall over the next decade. And despite the growth of products like nicotine pouches, the lost revenues are going to be hard to replace.
I might be wrong about Imperial Brands, but it’s not a stock I want to be buying at today’s prices. And there’s no way around this if I invest in a fund tracking the FTSE 100.
With Berkshire however, the situation’s different. While the individual subsidiaries face their own challenges, none stand out to me as under the same kind of long-term pressure.
Structure
The biggest reason I prefer Berkshire Hathaway though, is its structure. A company with different subsidiaries has one enormous advantage over a collection of individual businesses. Unlike the constituents of an index, Berkshire’s subsidiaries can work together. For example, the insurance operation can provide cash that can be invested to support the utilities business.
Equally, a profitable railroad can offset insurance losses when something unexpected happens. This puts each of the individual subsidiaries in a stronger position than it would otherwise be.
This doesn’t happen in an index fund. The chances of Apple or Visa using its cash to help Ford or Boeing strengthen in a cyclical downturn? Close to zero.
Berkshire after Buffett
All of this is why I prefer buying shares in Berkshire Hathaway over investing in a fund that tracks a diversified index. But there’s a reason it isn’t the only stock in my portfolio.
Not everyone agrees with this, but I think the firm will be in a worse position when Buffett isn’t around. It will still have a lot of its advantages, but something will be lost. That’s the biggest risk with the company and there’s no equivalent danger with the FTSE 100 or the S&P 500.
On balance though, I’m still optimistic for better returns from Berkshire Hathaway shares.
