Sunday, October 1, 2023

Comparing S&P 500 And Berkshire Hathaway

One of the reasons why I had recommended S&P 500 and Berkshire Hathaway (Berkshire) was that both were representative of the United States (U.S.) market, so in my opinion they are good choices for newbies to enter it.

The other reason for their inclusion, something which I did not highlight much about,

was their relative performance with each other; a comparison between the two as stated in the latest Berkshire letter to shareholders, over a 58-year period from 1965 to 2022, Berkshire returned compounded annual gain of 19.8%, as compared to S&P 500’s 9.9%1. A USD 100 investment into Berkshire in 1965 will return around USD 2.42 million as at the beginning of 2023 versus S&P 500's roughly USD 22,4002.


A Relook


For a more recent analysis, using Portfolio Visualizer, I had pulled out an in-depth view of the two counters. Available data for Berkshire Hathaway Class A share between Jan 1986 and Dec 2022 (Class A was chosen as it had a longer history than Class B, which was issued in 1996) was compared with the Vanguard 500 Index Fund Investor, acting as a proxy for the S&P 500.


During this period, Berkshire's compounded annual growth rate stood at 15.23% against S&P 500's 10.42% (see Figure 1). Looking at rolling returns, which is of interest to long term investors, the average 10-year and 15-year for Berkshire stood at 14.30% and 12.87% respectively, with S8P 500's average 10-year and 15-year at 9.93% and 8.54% respectively (see Figure 2).


Fig.1: Returns and other data between Berkshire Hathaway and Vanguard 500 Index Investor, Jan 1986 to Dec 2022. Source: Portfolio Visualizer. Click to view larger.

Fig.2: Rolling returns between Berkshire Hathaway and Vanguard 500 Index Investor, Jan 1986 to Dec 2022. Source: Portfolio Visualizer. Click to view larger.


Why The Difference?


Berkshire is currently helmed by two of the greatest investors known by many: Warren Buffett and Charlie Munger. Part of their successes can be attributed to their value investing methodology (discounted cash flow and intrinsic value), looking for great companies (having a wide "moat") and having the virtue of patience ("be fearful when others are greedy..."), to name a few.


Investing in Berkshire is like investing in an actively managed fund, just that you need not pay the high fees that are associated with it. Being a "fund", Berkshire has the discretion to buy and sell companies within its portfolio as it deems fit.


This is unlike the S&P 500 in which the investment vehicles following it (e.g., exchange traded funds, unit trusts, etc.) must at least replicate most of the holdings of the index itself, thus there is no freedom of selection.


Another overlooked aspect of Berkshire is it holds both public and private companies. You may have heard about it having close to 50% of holdings in Apple, but that does not mean 50% of Berkshire's invested funds are in Apple. Notable private companies under Berkshire's belt included See's Candies, Duracell and insurance companies GEICO and Gen Re. These private companies would have contributed further to Berkshire's returns. Also, it is from its insurance arm that Berkshire can garner the cash power to purchase equities using insurance float (difference between premiums and claims paid out).


Why Still Need S&P 500?


Despite the superiority of Berkshire's past performance over S&P 500, the latter is still included in a U.S. market beginner's toolbox. The reason is obvious: diversification.


Both Berkshire and S&P 500 represented different microcosms of the U.S. market and economy in general, and having them would be the closest thing in getting one's fingers dipped into the whole U.S. market and economic pie.


Furthermore, the management and investment decisions of Berkshire would have to be handed over to the next generation after Buffett and Munger, which there may be some deviations in investment methodology and decision-making process. The term “past performance does not indicate future results” is to be reminded of.


Contrasting to S&P 500, as an index, the inclusion of companies followed a set of requirements, which included market capitalisation, profitability and liquidity. This captures the essence of the microcosm analogy described above as the S&P 500 showed the current sectoral and industrial trend of the U.S.


And to conclude this post with a fact: S&P 500 contains Berkshire, too, and it is among the top 10 constituents by index weight3.


The Bedokian is vested in Apple, Berkshire Hathaway and S&P 500 via the SPY ETF.



1 – Berkshire Hathaway Inc. Shareholder Letter 2022, p2. (accessed 30 Sep 2023)


2 – Berkowitz, Bram. If You Have Invested $100 in Berkshire Hathaway in 1965, This Is How Much You Would Have Today. The Motley Fool. 3 Jan 2023. (accessed 30 Sep 2023)


3 – Equity S&P 500. S&P Dow Jones Indices. 31 Aug 2023. (accessed 30 Sep 2023)

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