Should You Buy Berkshire Hathaway or This S&P 500 ETF?

Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) and the Vanguard S&P 500 ETF (NYSEMKT:VOO) are both stable, long-term investments. Berkshire Hathaway, a struggling textile maker that Warren Buffett transformed into a massive conglomerate over the past six decades, is invested in nearly 50 stocks and ETFs. The Vanguard S&P 500 ETF, which was launched in 2010, passively tracks the performance of the S&P 500 index with a low expense ratio of 0.03%.

If investors simply buy these two tickers and hold them for a few decades, there's a good chance they'll outperform most of their stock-picking peers. But if you can only pick one, should you stick with the Oracle of Omaha, or just invest in the S&P 500?

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Reasons for investing in Berkshire Hathaway

Over the past 10 years, Berkshire Hathaway's stock rallied 224% as the S&P 500 advanced 180%. That track record of consistently beating the market reinforces Warren Buffett's reputation as one of the world's most successful investors -- so it makes sense for most investors to simply let him pick the best stocks.

By buying a single share of Berkshire Hathaway, investors gain instant exposure to leading blue-chip stocks like Apple, Bank of America, American Express, Coca-Cola, and Chevron. It also directly owns Geico, Gen Re, and other smaller insurance companies.

Berkshire Hathaway doesn't pay a dividend, but it bought back nearly 13% of its shares over the past decade. It also ended the first quarter of 2024 with $189 billion in cash and equivalents, so it still has plenty of dry powder for bigger buybacks and investments.

Most investors value Berkshire Hathaway with its price-to-book ratio instead of its price-to-earnings ratio, since its profits fluctuate year to year with the performance of its investments. By that measure, its price-to-book ratio of 1.6 still looks reasonable -- and it should rise as its portfolio flourishes again in a warmer macro environment.

Reasons for investing in the S&P 500

Berkshire Hathaway might seem like a compelling alternative to the Vanguard S&P 500 ETF -- until you consider three issues.

First, the popular ETF actually generated a total return of 236% over the past 10 years -- so investors who reinvested their dividends would have outperformed Berkshire Hathaway by about 12 percentage points.

Over the past 20 years, Berkshire Hathaway's stock rallied 604% as the S&P 500 advanced 383%. But if you include reinvested dividends, the S&P 500 delivered a total return of 616% and slightly beat Berkshire Hathaway again.

Buffett refuses to initiate a dividend because he believes it would be a smarter to spend that cash on new investments and buybacks. However, it might have generated a higher total return than the S&P 500 if it simply paid some dividends.

Another issue is Berkshire Hathaway's heavy exposure to Apple, which accounts for 43.5% of its entire investment portfolio. For reference, Apple only accounts for about 6.6% of the S&P 500 index. If Apple loses its momentum and struggles to impress the market over the next few years, it could drag down Berkshire Hathaway a lot more than the S&P 500.

Lastly, Warren Buffett is 93 years old and is expected to hand the reins over to his successor Greg Abel in the near future. But Abel, who leads Berkshire Hathaway's noninsurance businesses, isn't a dedicated stock picker like Buffett. So for now, there's no way to tell if Abel can maintain Buffett's decades-long streak of beating the market.

The better buy: The Vanguard S&P 500 ETF

Warren Buffett notably left his wife, Astrid Buffett, simple directions for managing her inheritance once he passes away: Invest 90% in a low-cost S&P 500 index fund and the remaining 10% in short-term government bonds. Those instructions suggest that even Buffett doesn't know what will happen to Berkshire Hathaway once he's gone.

Yet Buffett is clearly still bullish on the U.S. economy. Therefore, I believe it makes more sense to follow Buffett's advice to his wife and simply buy an S&P 500 index fund or ETF, automatically reinvest its dividends, and tune out the near-term noise.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.