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Berkshire vs. Index Advocates June 30, 2008

Posted by shaferfinancial in Uncategorized.
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The internet is full of folks giving out investment advice for free.  Many like to quote Warren Buffett, when he suggests individual investors should invest in index funds.  I agree, if you are going to invest in mutual funds you should invest in index funds.  But, why invest in mutual funds?  For safety?  Reduced risk of diversification? Of course, those areas of concern only push down your rate of return.  Then there is the fact that most people invest inside their companies 401K.  Mutual funds inside company 401Ks typically have much larger expense ratio’s and costs than what you can find on the general market and typically don’t offer index funds.

I spent many years working for someone else and accumulated savings in my 401K, which I rolled over into a single IRA.  Eventually, I moved my mutual fund IRA to a Brokerage IRA in order to sell my mutual funds and buy Berkshire Hathaway B’s.  I wanted some real estate exposure, so with a small amount of my IRA I bought the Health Care REIT (HCN), a leveraged real estate investment trust that specializes in health care facilities.  This strategy is available to many folks out there even if you are working for the same company that manages your 401K.  According to the masses on the internet, I should have put my money into a low expense index fund like Vanguard’s Total Stock Market Index (VTSMX).  But as my regular readers know, I believe in “evidence based” financial planning so I went with what the actual evidence told me instead of the theories of the financial crowd.

Here is the evidence you might want to look at:  10 year after tax return for Berkshire= 18%, 10 year after tax return for VTSMX= 3.89%, 10 year after tax return S & P 500 Index= 4.21%, 10 year after tax return for HCN (Includes required profit pay outs)= 14%

With that evidence I made my changes to the IRA.  If you did the same 1 year ago on July 2nd, 2007 here is what you would have recieved in rate of return compared to an S & P 500 Index Fund (USAA) and Vanguard TSMF.

   Investment                           Return                            Taxable Dividends/Capital Gains

   Berkshire                                 11%                                          $0

     HCN                                     9.6%                                         $1.32/share

   VTSMX                                 -6.34%                                     $.74/share

   S & P 500                             -6.87%                                     $.42/share

Follow the evidence folks, not what the internet masses say!  Remember when you follow the herd you end up where the herd is going!

  Remember as usual, this is only the musings of the village idiot, who has no license to sell stocks, bonds, or REIT’s.  This blog is for amusement purposes only and does not represent any expert advice as determined by the SEC authorities.

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Comments»

1. Minh - July 1, 2008

What if Berkshire goes bankrupt tomorrow? (it’s not impossible)
My point: all depend on your risk tolerance.
Also making 1 year or 10 year return comparision is not practical for a 30-40 retirement plan.

2. shaferfinancial - July 1, 2008

Yes, not impossible. Berkshire owns over 100 companies outright and owns significant percentages of stock in about 40 more. Bankruptcy for Berkshire basically means total meltdown of the world economy and bankruptcy for everyone.

Really, you want to compare Berkshire Hathaway over a longer period? How about 43 years, long enough for you? Berkshire’s return over 43 years is 21.1%. One to ten years Not practical? Well how speculative do you want to be? The longer you look the more speculative it is.

Take a look around the blog. There is much to savor. You don’t have to agree with any of it, but it might help you start to understand where I come from and what I am trying to accomplish. Check out my web site: http://www.shaferwealthacademy.com

Here’s to learning how to seperate from the herd!

3. Minh - July 2, 2008

Yes, historically Berkshire Hathaway beats any index, but just hope Warren Buffet can live and run his company to 120 when I retire and Berkshire can maintain its growth rate.
Again, my point: reward goes with risk.
100 companies vs. 3000 companies

4. shaferfinancial - July 3, 2008

Don’t know how you come up with your risk analysis.
Here’s mine: The rate of return from every decade period since Berkshire has been owned by Buffet has factually told us that Buffett doubles the rate of return of the S & P 500. Buffett is still alive and running the company.

Somewhere along the line before you retire, you will have to look at your investing and make some decisions. So will I. At that point I will look at the investment universe and make a decision. Only thing is I will have benefitted from Berkshire’s better performance for a period of time no less than 10 years.

S & P 500 return for this decade (2000’s) is trending toward zero. What does a zero rate of return for a decade do for your retirement planning?

Once again, I suggest taking a more active position in your investing instead of relying on a theory of being average. Average will put you in the poor house! Sounds like you are already thinking about these things at your young age, which is a great sign.

Research into diversification indicates 25-30 companies is fully diversified.


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