Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.
For this issue, I will introduce two securities from the United States (US) market: the SPDR S&P 500 ETF (ticker: SPY) and the Berkshire Hathaway Class B shares (ticker: BRK.B).
During my “transition period” between 2013 and 2014 when I switched from trading to investing, I had done some research into the US markets. The US economy then was, and still is, the largest economy in the world by Gross Domestic Product (GDP). I had identified four securities that were relatively basic for a beginning investor to enter the US, and two of them were SPY and BRK.B.
About SPY & BRK.B
SPY tracks the S&P 500, one of the major US indices used by traders and investors all over the world. I did not choose the other two popular ones, namely the Dow Jones and the Nasdaq, because the former has too little companies (only 30) while the latter is too heavily based on technology.
Although there are a number of ETFs tracking the S&P 500, SPY (by SPDR) has the largest total market capitalization (US$241.61 bn as at 20 Dec 20181) and a high trading volume, meaning it is liquid and easily tradable. While dividends from SPY are subjected to a 30% withholding tax by the US tax authorities, there is another London-listed S&P 500 ETF by Vanguard called VUSD, which the withholding tax is only 15% due to the US-Irish tax treaty. Either way, it’s your call on which to select.
Berkshire Hathaway, where the famous value investors Warren Buffett and Charlie Munger are at, has shareholdings in a number of listed companies, like Coca Cola, Apple, American Airlines and General Motors, to name a few. It also has subsidiaries in non-listed businesses such as food & beverage company Dairy Queen, insurance firm GEICO and chemicals provider Lubrizol.
Notice Berkshire Hathaway has two share classes, A (BRK.A) and B (BRK.B). As of market close on 27 Sep 2019, BRK.A was at US$311,450, while BRK.B was US$207.45, so the latter is (very) affordable for us retail investors.
Why SPY & BRK.B?
Simple, these two counters are, in my opinion, the representatives of the US equity markets. Both SPY and BRK.B contain individual counters such as Coca Cola, Apple and Wells Fargo, and SPY itself contains BRK.B as well. Though having similar holdings, their sector and company weightages are very different, and along with it their performances. Using the period 1997 – 2018 (BRK.B was created in June 1996) and comparing the two, BRK.B returned with a compound annual growth rate (CAGR) of 10.60% (before inflation) vis-a-vis SPY’s 7.61% (before inflation). Figure 1 below shows the comparison graphically.
Fig.1: Performance of SPY (blue) vs BRK.B (red) for the period 1997 – 2018. Inflation not factored in. For full data set click here.
And there is another glaring difference between the two; BRK.B does not distribute dividends, while SPY does. As a dividend investor, you may think that I would probably not consider BRK.B, but since I also advocate a little bit of growth, getting it fulfills that portion of our portfolio.
To sum it all up, I view both as major indicators of US equities, with BRK.B sitting as my growth counter, and SPY for dividends (though small) and also growth.
The US economy has been volatile for the past few years due to trade tensions, geo-political issues and that deemed incoming (but don’t know when) recession. Still, a lot of observers and analysts had said the S&P500 is currently overvalued (P/E ratio of 19.48 and P/B ratio of 3.3853 as at 27 Sep 20192) and it is not the right time to enter. All I can say is that we just chug along this journey and probably practice periodic purchases of SPY.
As for Berkshire Hathaway in general, both stalwarts Buffett and Munger are advanced in their ages, but there is no sign of them stepping down. The company was built based on their investment philosophies and strategies, so there will be some keyman risk should either one or both vacates. There is news that a couple of senior executives are taking over some of the business operations, and if they take over fully, expect some slight variations in their investment approaches from their predecessors.
As these counters in the portfolio were bought at below current prices, I may consider averaging them up in future.
Bought SPY at:
USD 207.00, Aug 2015
USD 203.85, Mar 2016
USD 205.40, May 2016
USD 255.50, Oct 2017
Bought BRK.B at:
USD 111.70 & USD 113.15, Feb 2014
USD 119.50, Mar 2014
USD 126.00, Aug 2014
USD 148.30, USD 147.50 & USD 145.28, Jan 2015
USD 147.30, Feb 2015
USD 164.00, Apr 2017
1 – Hernandez, Ben. 10 Biggest ETFs of 2018 By Total Market Capitalization. ETF Trends. 20 Dec 2018. https://www.etftrends.com/10-biggest-etfs-of-2018-by-total-aum/ (accessed 27 Sep 2019)
2 – Bloomberg. S&P500 Index. As at 27 Sep 2019. https://www.bloomberg.com/quote/SPX:IND (accessed 27 Sep 2019)