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How to make 7 million in 7 years …

Should you buy Berkshire Hathaway instead of an Index Fund?

After yesterday’s post which was aimed squarely at my readers who want to get rich – I hope all of you ;) – I thought that I should write a follow-up piece aimed at the window-shoppers who are stopping to look at my Get Rich(er) Quick(er) wealth creation ‘catalog’ but have no intention of ‘buying’ …

This question arose as a result of a recent article on Get Rich Slowly  which references the same Warren Buffett quote that that I posted yesterday:

What advice would you give to someone who is not a professional investor? Where should they put their money?
Well, if they’re not going to be an active investor — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.

Get Rich Slowly then went on to say something very interesting:

Buffett has said this time and time again, which is why I’m baffled when people use Buffett as a reason to not diversify. I am not Warren Buffett. Neither are you. Unless you have Buffett’s combination of patience and intense research, you’re better off putting your money in an index fund. (As one reader recently noted, if you can afford to buy a share of Buffett’s company, Berkshire Hathaway, you’re getting the best of both worlds: a diversified portfolio picked by Warren Buffett!)

… which I also commented on yesterday, but it’s the “one reader” comment at the end, that grabbed me.

If Warren Buffett is indeed the World’s Greatest Investor (he is, without a doubt!), and you want to diversify as he recommends, why not forget about the “low cost index fund” option altogether, and jump straight to the top i.e. into Berkshire Hathaway (the company that Warren controls)?

Why?

Because, Warren didn’t recommend it … he’s too ethical to recommend it … in fact, he even says openly that an investor with $1,000,000 can achieve far better returns than he can nowadays, because Berkshire is just too darn big to move quickly and must invest in such large sums that the number of opportunities out there are much smaller for them than for us ‘little guys’.

Of course, the occasional ‘big opportunity’ opens up for Berkshire Hathaway, because of their $60 Billion ‘war chest’ … in the meantime, that $60 Bill. just sits in the bank barely beating inflation.

Even if Warren were still at his ‘smaller, more nimble’ peak, he still would NOT recommend that you do as “one reader” suggests because:

1. You would be buying just ONE stock … admittedly one that has performed well in the PAST and MAY (or may not) perform well in the future, and

2. You would be buying into only a partially-diversified conglomerate … a ‘piece of Warren’ rather than a ‘piece of [the whole of] America’.

So, if you are on the path to saving rather than investing, do what Warren Buffet himself suggests: stick to low-cost index funds …

… only buy any individual stock – including Berkshire Hathaway – if you are in the business of investing and really know what you are doing.

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5 Responses to “ Should you buy Berkshire Hathaway instead of an Index Fund? ”

  1. notworriedaboutmoney says:

    You nailed it. Not everyone can stomach the porfolio volatility. But if you can ( a necessary trait for those in the business of speculating), the market bench mark is lunch money.

  2. AJC says:

    @ notworried – Thanks! You had me … until you mentioned ‘speculating'; there is a ‘safe’ and profitable in-between: it’s taking a bet on a few good businesses that the market is currently underpricing and buying their stocks and holding for the long-term. It’s what Warren Buffett does … but, it hardly counts as speculating :)

  3. moom says:

    Buffett has been saying this for years and keeps cranking out good returns for BRK shareholders (including me). I don’t think anyone should put a huge proportion of their net worth into BRK but it makes sense to put a little (I have 2% of mine in BRK) and in a bunch of other good investors, for example LUK. Of course, you want to buy when they look cheaper…

  4. AJC says:

    @ Moom – But, then you’re really investing neither in “a little piece of ALL of Corporate America” as Buffett himself SUGGESTS, nor in a handfull of undervalued businesses as he DOES.

    Then again, nobody said that you had to make money Warren’s way … or mine ;)

    After all, Moom’s gone from $50k to $500k Net Worth in just 5 years … if you want to invest Moom’s way, he has a great blog: http://moominhouse.blogspot.com/

  5. […] mentioned on this site before that Warren Buffett agrees […]

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