Buffett is doing fine without an ETF

That time machine your brother in law has been working on in his basement appears to be working. At least, this headline suggests we’ve all been transported back to 1999: Warren Buffett should just buy an ETF.

Back then, Buffett was routinely chided for missing out on the massive run-up in technology stocks. “He should follow the crowd.” “He’s lost his touch.”

Then the bubble popped, and Buffett has been lauded as the master investor for the past decade.

Until now, when his Berkshire Hathaway conglomerate has temporarily lagged the U.S. index.

According to the article cited above (to be fair, it was citing a Forbes article), Buffett would be better off if he sold out of Berkshire and bought an ETF, namely the Vanguard Total Domestic Equities, which trades on the NYSE as VTI.

The juicy part of this suggestion is that it pits Buffett’s investment acumen against that of Jack Bogle—both of whom no doubt would have a chuckle at the notion of retail investors debating the merits of these investment icons.

A one-year chart shows Berkshire Hathaway (both A and B shares) outperforming the VTI—admittedly making a late surge to top the ETF. Over the five year horizon, the Berks have posted low double digit returns, while the VTI is down roughly 5%.

Over 10 years, the Berks are ahead more than 60%, while the ETF is up 40%.

While the MER on the Vanguard ETF is a ridiculously low 0.06%, applying that to Buffett’s estimated net worth of $44.4 billion means he’d be dinged for $26,640,000 in fees—granted, a portion of his net worth may not be tied up in Berkshire Hathaway shares.

The cost of managing Berkshire’s capital is likely not cheap either, but given the track record above, long-term shareholders may feel justified in trusting the Oracle of Omaha.

Pure Buffett

In May 2012, Berkshire Hathaway held its annual general meeting—half investment forum, half county fair, but always a source of folksy wisdom from the Oracle of Omaha. His latest pronouncements included:

On gold

“If you own an ounce of gold now and you caress it for the next 100 years, you’ll still have an ounce of gold. It’s very hard for an unproductive investment to be productive for any period of time. If you own 100 acres of farm land, 100 years from now you would own 100 acres of farm land, but have earned income for 100 years.”

“When Berkshire started, gold was at $20 and Berkshire stock was at $15. Now gold is at $1,600 and Berkshire is at $120,000.”

On banks

“American banks are in a far, far better position than they were three to five years ago. The U.S. banking sector is in fine shape. The European banking system is gasping for air.”

On the “Buffett rule”

“People who make large incomes should pay a tax rate around 35%. The 400 largest incomes in the U.S. make $270 million each and 131 of them pay below 15% in taxes. They’re paying less than standard payroll taxes. It would affect very few people and it would raise a lot of money.”

“In 2004, 2006 and 2010, with no tax planning and no Swiss bank accounts, I paid the lowest tax rate among all employees at Berkshire’s Omaha headquarters. That’s between 20 and 30 people. That’s astonishing.”

On stocks

“The beauty of stocks is they sell at a variety of prices. That’s how Charlie and I have gotten so rich. The market is a psychotic drunk, and sometimes Mr. Market does very strange things. It’s built into the system that stocks get mispriced. Don’t behave like the psychotic drunk. The stock market is the most obliging, money-making place in the world.”

On acquisitions

“If we like the business that we understand, we buy it. There’s always going to be good and bad news out there. We look to value; we don’t look at headlines.”

“Business schools focused on one fad after another which are mathematically based. They go against conventional long-term wisdom. Learn how to value a business, not option pricing. ‘Why does the business make money?’ is what’s important. Know which businesses you can value versus those that you cannot value.”

On newspapers

“News is what you don’t know but want to know. I think there is a future for newspapers where there is a sense of community. It’s not as bulletproof as it was 50 years ago. I don’t know of a business plan that charges significantly for one version (the physical newspaper) and it’s free for the other (online version) that would work over time.”

“Newspapers have lost primacy in many areas, such as stock price listings and classified advertising but continue to offer information that readers can’t find elsewhere. A bigger problem is how to make money online at a time when many are tempted to give the product away for free.”