Why Bother Diversifying, Just Buy Berkshire Hathaway

One of the most asked questions I get from readers of my books and blogs — especially after the publication of my latest book Think, Act and Invest Like Warren Buffett — is: Instead of building a globally diversified portfolio, why not just buy the stock of Buffett’s company, Berkshire Hathaway (NYSE:BRK.A )?

With the turn of the year I thought it a good time to use Morningstar’s data to compare the performance of BRK.A to that of the leading passively managed, domestic asset class funds. Morningstar provides returns information for the 5-, 10- and 15-year periods ending December 31, 2013. The table below shows the performance of BRK.A, along with the return on Vanguard’s 500 Index Fund (MUTF:VFINX ) and four of Dimensional Fund Advisors’ domestic asset class funds: large value, small, small value, and real estate. (Full disclosure: My firm Buckingham recommends Dimensional funds in the construction of client portfolios.) By using live funds we can see real world, not hypothetical index results. Also shown are the results of an equal-weighted, annually rebalanced portfolio of the Vanguard and Dimensional funds.

1999-2013

9.5

• For the most recent five-year period, BRK.A underperformed all five of the passively managed asset class funds, with the underperformance ranging from 3.4 percent per year to 10.8 percent. The equal-weighted portfolio returned 20.6 percent per year, outperforming BRK.A by 7.6 percent per year.

• For the most recent 10-year period, BRK.A outperformed VFINX by just 0.4 percent per year, and underperformed the other four by from 0.5 percent per year to 2.5 percent, per year. The equal-weighted portfolio returned 9.1 percent per year, outperforming BRK.A by 1.4 percent per year.
• For the most recent 15-year period, BRK.A outperformed VFINX by 1.8 percent per year, and underperformed the other four by from 1.7 percent per year to 5.9 percent per year. The equal-weighted portfolio returned 9.5 percent per year, outperforming BRK by 3.1 percent per year.

The bottom line is that those that took all the risks of concentrating their investments with the legendary Oracle of Omaha went unrewarded relative to the returns available from well-diversified portfolios consisting of passively managed asset class funds. Investors who did take the concentration risk might want to ask themselves these two questions: If I’ve been waiting for 5, 10 or 15 years for superior performance as compensation for the concentration risk, how much longer is it prudent to keep waiting? And why would I expect now to be rewarded when for 15 years taking that risk has actually resulted in lower, not higher returns?

My guess is that most investors in BRK.A are unaware of the evidence. You no longer have that excuse.

Next time, we’ll take a look at the performance of two of the superstar investors Buffett identified in his 1984 talk about Graham and Doddsville.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Since you’ve shown interest in BRK.A, you may also be interested in