Why This Index Fund Investor Purchased an Individual Stock
I hopped out of the shower and into my Fruit of the Looms. After a quick electric shave, powered by Duracell, I put on my favorite Original Penguin shirt from Munsingwear and a pair of jeans and strapped on my Tony Lama boots. I looked pretty sharp. Not as cute as my son in his Garanimals or as dashing as my wife and her Helzberg Diamond ring and white gold necklace from Ben Bridge Jeweler.
After perusing the Buffalo News and enjoying a hearty brunch prepared with our Pampered Chef cookware, I headed out for an important meeting, but not before grabbing a few See’s Candies bon bons — I have a bit of a sweet tooth — and admiring the accent wall in the dining room, freshly livened up with Benjamin Moore paints.
I left with enough time to grab a Dairy Queen Blizzard before hopping aboard the Net Jets plane I had reserved. I sometimes fly coach, but when you’re meeting with the Marmon Group, a $4.5 Billion holding company, you pack an Italian suit and take a private plane.
I Made All That Up.
Truthfully, almost none of this is true. I do have an Original Penguin shirt and a penchant for Blizzards and See’s candy, and my boys have donned Garanimals, but I made the remaining details of this story up. Why?
I own all of these businesses.
Every brand name dropped above is 99% to 100% owned by Berkshire Hathaway Inc., and I am a Berkshire shareholder. Let’s try this silly exercise again with companies partially owned by Berkshire Hathaway.
The Rest of The Story
On the way to Chicago, I opened the Coca Cola, Cracker Barrel Cheese, Planters Peanuts, and Claussen Pickles I had picked up at Wal-Mart for an unconventional but satisfying lunch. I normally shop at Costco, but I ever since they switched from American Express to VISA, I don’t go there as much.
I was picked up in a Cadillac and I directed the chauffer to swing by a Wells Fargo branch so I could withdraw some cash for a brewery tour — I wasn’t sure they would take my Mastercard. We proceeded to grab some Burger King, conveniently located next to the Phillips 66 station, and made our way to the Loop.
Before the meeting, I pulled out my Apple iPhone (shipped by UPS, on Verizon service) and paid our Charter bill online. After hours of intense negotiation, or whatever it is that business people do at business meetings, I enjoyed a few tasty beverages before turning in early to ensure I could catch my American Airlines flight home the next day.
Berkshire Hathaway Owns Many Companies.
I could write paragraph after nonsensical paragraph like those above, but I think the point has been made. Owning shares of Berkshire Hathaway is a bit like owning a mutual fund. It is a basket of individual companies. For a complete list, see Wikipedia’s list of assets owned.
Berkshire Hathaway also keeps a list of links to subsidiary companies on its website (prepare to be awed by the 1990s coding technology!), but ignores corporations with minor holdings. You’ll also find links to Warren Buffett’s and Charlie Munger’s letters to shareholders, annual reports, and more on the barebones homepage.
The Performance of Berkshire Hathaway
Since I made my purchase just over a year ago on August 17, 2016, the stock has performed quite well. According to Personal Capital and consistent with the current value of my holdings, I’ve seen a 20.8% increase over the nearly 13-month period, while my overall portfolio returned 13.3% and the S&P 500 14.2%.
Early on, it seemed to perform similar to my Small Cap Value index fund, which makes some sense given its holdings, but it has since separated itself nicely. This is what the graph looks like with Vanguard’s Small Cap Value Index.
Over the same span, Small Cap Value has returned 13.8%, just under the return of the S&P 500, trailing Berkshire Hathaway’s returns by a substantial margin.
Berkshire Hathaway’s historical performance is legendary. What if I had started investing in the company when I finished medical school in 2002?
I would have nearly quadrupled my money, whereas the S&P 500 returned 151.4%. I question the accuracy of the index data here, however, with DQYDJ’s S&P 500 calculator with dividends reinvested showing a 261% return over a similar timeframe.
Even if that’s true, Berkshire Hathaway still wins. There’s a reason Omaha ranks among the U.S. cities with the most millionaires per capita. The compound annual growth rate of the company over the last 50 years is 20.8%
Of course, past performance does not predict future results. And the men responsible for these returns are no spring chickens. Some investors or would-be investors are concerned that the value of the stock will drop when the stalwarts Charlie Munger and Warren Buffett pass away, but Buffett has gone on record to say he predicts the stock price will increase the day after the inevitable happens.
Berkshire Hathaway Pays No Dividend
For some investors, this would be considered a turnoff. For a high-income professional, however, the lack of a dividend is something to celebrate!
It’s commonly known that qualified dividends are taxed at a rate of 15%. If you’re in a low tax bracket (the 15% federal income tax bracket = ~ $75,000 of taxable income for a couple), qualified dividends are tax-free. I hope to take advantage of this fact in retirement.
However, for the high-income professional with a taxable investment account, dividends are the enemy of your total return.
Sure, there’s the aforementioned 15% tax on qualified dividends. In most states, you can add on state income tax of about 4% to 10% or more. Some cities impose an income tax on dividends, too.
If you enjoy the household income of many physicians, you’ll be subject to the 3.8% NIIT (ACA) tax. And it you’re in the top federal income tax bracket, tack on another 5%. It’s not uncommon to give back 25% to 35% of your qualified dividends.
In the case of ordinary dividends, the tax treatment is even worse — you’ll be taxed at your marginal tax rate, which for many of us can exceed 40% or even 50%.
Berkshire Hathaway has famously paid no dividend, meaning you will pay no taxes along the way simply for owning the stock in a taxable brokerage account. While there are tax managed funds, their tax efficiency pales in comparison to Berkshire Hathaway.
Eventually, if you have a gain in the stock, as I hope and expect to do, you may owe some capital gains taxes. But if you wait until retirement to cash out, you may very well find yourself in a lower tax bracket, possibly in the bracket in which you can avoid federal taxes on long term capital gains entirely.
There’s another reason I purchased this strong performing, no-dividend paying individual stock. The Berkshire Hathaway Annual Shareholders Meeting.
Woodstock for Capitalists
Every spring, the wealthy, the wannabe wealthy, investment gurus, and money geek bloggers like me descend upon Omaha, Nebraska to partake in the spectacle sometimes referred to as “Woodstock for Capitalists.”
I have not yet made the trip — I purchased my first shares of BRK.B just last fall and was on call that weekend this spring — but I would like to attend the extravaganza soon. At ages 93 and 87, one never knows how many more opportunities we’ll have to see Charlie Munger and Warren Buffett speak and sip Cherry Coke in person.
In addition to seeing the legends in person, the meeting would also present an excellent opportunity to network with other bloggers and authors who make the trip from around the country and globe. And besides, I’ve never found another reason to visit Omaha. I’ve heard they’ve got a nice zoo.
Do you purchase individual stocks? Are you a Berkshire Hathaway owner? Any plans to attend Warren-palooza 2018 or have you attended in the past?
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