If you had a set amount of money to invest in one thing—say, about a million bucks—there’s an interesting thought experiment you could perform before sinking that money into Beanie Babies or baseball cards. (You know who you are out there!)
What Is Berkshire Hathaway?
First we’ll take a look at Warren Buffett, history’s most famous investor, and his company Berkshire Hathaway (BRK), of which he is both Chairman of the Board and Chief Executive Officer (CEO).
Berkshire is a diversified “holding company”: basically, it owns lots of other big companies under one umbrella. Buffett’s firm is known for holding a large number of blue chip stocks in its portfolio, giving it a controlling interest in some of America’s most recognizable corporations. This includes behemoths like Coca-Cola, major energy utilities, and insurance companies.
In addition, Berkshire Hathaway is heavily invested in general index-tracking funds. Hence, its performance is closely tied to the strength of the S&P 500, for instance. When you look at its share price over time, it suffered mightily during stock market downturns in 2008-2009 and early 2016.
Buffett has seen his company recover most of its losses over the last year, and its overall return is over 115% during the past five years. Historically, it has an unbelievable track record of growing the wealth of its shareholders who bought in during the 1990s and earlier. Currently, BRK preferred stock (BRK.A) come in at nearly $215,000 per share! It is obviously exclusive to only the wealthiest investors. (The firm also issues a more common stock that trades around the $140/share range.) It may just be a holding company, but Berkshire Hathaway boasts a market cap of nearly $350 billion.
One way in which the firm has laid its claim to fame is in kicking the stuffing out of hedge funds, which are seen as a popular investment vehicle for the ultra-wealthy who can afford it. Due to exorbitant fees, hedge funds have woefully underperformed Buffett’s picks. Even the best fund managers, with all of their complicated mix of investments and savvy regarding the “tricks of the trade” of the markets, can’t seem to match the more passive investing strategy of Buffett.
Buffett Shuns Gold
Mr. Buffett famously does not invest in gold, seeing it as inferior at diversifying a portfolio when compared to different equities. In fact, his followers make unbelievable arguments against the yellow metal: “Gold has no intrinsic value other than for jewelry and some industrial use, it produces no income,” says one head of a wealth management firm, according to CNN Money. Buffett himself has said that “It doesn’t do anything but sit there and look at you.”
Berkshire usually has a position against gold, if any at all, and Buffett’s consistent advice is that the metal is of little value in terms of diversity. He simply recommends a traditional allocation of stocks and bonds. No matter how successful his investment picks have been, this is one view where the so-called “Oracle of Omaha” is at odds with a tried-and-true conventional wisdom.
Interestingly enough, however, Buffett has invested nearly $1 billion in silver in the past. In this case, the strong industrial demand for the precious metal does distinguish it from gold while still providing some exposure to the same broad market. In some sense, silver’s price behavior is hedged halfway between copper (on the industrial side—rises when the economy is good) and gold (on the safe haven side—rises when the economy is bad).
As noted before, the obvious flaw in putting all of your faith in Buffett and BRK is that they are so closely tied to stocks and the Wall St casino. When the Dow Jones, S&P, or Nasdaq takes a hit (like it did this January), Berkshire suffers heavy losses. Meanwhile, gold investors are not generally imperiled by this kind of stock market downturn, as physical bullion provides a store of value for long-term wealth management.
So you’ve hypothetically got $1.3 million but you have to put all those eggs in a single basket. Which would you choose?
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.