Warren Buffet’s BRK-B Vs S&P 500 Analysis

Warren Buffett is widely regarded as the most renowned investor in the world. Meanwhile, the S&P 500 has been gaining popularity as it continues to hit record highs. This has prompted many to question whether they should invest in the S&P 500 or in Berkshire Hathaway, the insurance conglomerate through which Buffett executes his investments.

In this analysis, we will evaluate both options. For the S&P 500, we will use the SPY ETF as a proxy, and for Berkshire Hathaway, we will focus on its BRK-B shares.

Returns:

The chart above shows the probability of earning a positive return depending on how much time you remain invested in either asset. The chart shows that in periods below 1 year, the probability of a positive return is higher for the S&P 500, however for longer holding periods, Berkshire has a higher probability of yielding positive returns.

The chart above shows how the annualized return fluctuates for either investment. On average, BRK-B yields a 12.49% yearly return, while the SPY ETF yields 10.51%. 50% of the time the SPY ETF will yield 13.03% or more in a year’s time whereas BRK-B will yield 12.57%.

The table above shows the median seasonal return for either investment. 50% of the time the S&P 500 will yield positive return on every month while BRK-B yields negative returns on May and June.

The chart above highlights the top 5 highest drawdowns for BRK-B. Both investments tend to have similar drawdown periods. BRK-B maximum drawdown was during the 2008 great financial crisis, where the stock plunged by -53% and it took 1893 days to recover from this loss. Whereas the S&P 500 had a maximum drawdown of -55.86% and took 1773 days to recover.

Risk-Adjusted Returns:

The chart above shows the alpha generated by BRK-B over the S&P 500. On average, BRK-B generates an annualised alpha of 5.67%, this means that if both investments are equalised in terms of risk (beta), Berkshire Hathaway generates 5.67% excess return over the S&P 500. In addition, BRK-B generates on average a yearly sharpe ratio of 0.53 vs 0.49 S&P 500.

Why not own both?

The chart above shows the daily return correlation between both investments. It has historically averaged 0.55, which is particularly low. This means there has been diversification benefits owning both assets.

The scatter plot above shows the efficient frontier of different portfolios containing different combinations of weights between S&P 500 and BRK-B shares. The combination of 48% BRK-B 52% SPY has historically delivered higher risk adjusted returns than owning any of them independently. Assuming a 2.2% risk-free rate, this combination has rewarded investors with 0.53% excess return for every 1% of volatility assumed.

Conclusion:

Historical analysis suggests that a rational investor should not choose between the S&P 500 and Berkshire Hathaway, but instead consider holding both in their portfolio. However, historical performance does not guarantee future outcomes. Investors must assess whether the fundamentals that have driven the success of these assets in the past are likely to persist going forward.

We believe that BRK-B carries a premium due to Warren Buffett’s unparalleled reputation and investment acumen. However, at 93 years old, Buffett’s eventual succession poses a significant uncertainty. It is unlikely that his successors will match his extraordinary track record, which could impact the company’s performance and investor sentiment over the long term.

Full Report:

Full statistical report available for download in the additional information down below.