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.

 


You’re still not using Personal Capital? Track all your accounts in one place like I do.


 

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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61 comments

  • Nice post Doc. Never had the pleasure of meeting the legends in person but then never owned BRK – them not paying a dividend is one reason. I wanted to own A shares in my younger days, which would’ve cost all that I had and my first born. This stock passes my screen from time to time but haven’t pulled my mouse-trigger yet (not to be confused with Warren’s elephant gun). Clearly you’ll do well with it.

    • I had my eye on BRK.A shortly after I started my career. One share dropped down to about $70,000 at the nadir in 2009.

      That would have been a great time to pick up a share. They go for $270,000 these days — nearly quadruple! My hindsight is sharp. 🙂

      Cheers!
      -PoF

  • Berkshire Hathaway is an actively managed mutual fund with no expense ratio, dividends, or capital gains distributions.

  • Welcome to the Berkshire club. It’s a pretty neat place to be.

    You’ll find yourself in pretty good hands. 😉

  • I went in 2016 and it was one of the best trips of my lifetime. It was fun to follow Warren Buffett from place to place and we even saw him at Gothams steakhouse while we were waiting for our table (make sure you call and reserve early!). We also saw him driving into his house as we were checking it out (ok now I sound like a real creeper). The 5km run is really fun too! Of course during the AGM some people asked the same thing as AGMs in the past. We hope to go to The Daily Journal AGM in 2018 🙂

  • So far, the only individual stock I own is from my employer ESPP, but I stopped contributing when I learned more about index investing and focused on my 401K (with Vanguard) 🙂 I still have the stock and hang onto it, which hasn’t been a bad deal in the past few years!

  • Dusty

    Where do you buy Berkshire Hathaway stock?
    Do you have to go through them or is it publicly traded?

  • Hatton1

    Phil Demuth would be proud of you. Back in the day I used to love to watch PBSs Wall Street Week with Louis Rukyser (90s). It was I think the first show on personal finance and investing. I went to a “convention” in 2000 at the MGM grand attended by 11000 people. I think I was the youngest person there. I had my picture made with Louis who was in his 80s at the time. Lots of big name investing gurus spoke but none predicted the dot.com bust that was about to occur.

    • No kidding!

      You gotta love the fact that you were all standing at the edge of a cliff and nobody knew it.

      Jim Dahle (WCI) attended a Bogleheads conference and was similarly felt like he was the youngest person in the place as a thirty-something amongst others two to six decades older.

      Cheers!
      -PoF

  • Brett007

    Best zoo in the world. We go every year. They also have the college baseball World Series and Nebraska Cornhusker college football. That’s about it.

    • Well, the Huskers are an hour away in Lincoln, so I’m not sure if that counts. But I’m sure Omaha’s got to have some other redeeming qualities, and I intend to find out.

      Cheers!
      -PoF

      • Brett007

        Omaha is great! I lived there during my prelim medicine year while my wife was in med school. Beautiful city, amazing hospital, and extremely nice people.

  • I’ve not purchased any individual stocks yet. I’ve been throwing everything into real estate and index funds. Where do you purchase your stock?

  • Cathy

    Love following the rise of my BRKB in Personal Capital. Always hesitate to buy more because I like the dividend paying stocks (inheirited) that are auto-reinvested. Hadn’t really considered that these are all in a taxable account and therefore my BRKB is better for me tax-wise than the others. Thanks for that perspective. May buy more. Especially if it dips for a sec with all the insurance claims after the hurricanes.

  • I hold stock in my taxable account from Berkshire Hathaway. As you cleverly displayed, this individual stock is like an index fund because of all of the companies under the Berkshire Hathaway umbrella. Also, I too share your affinity for DQ Blizzards. I’m a big fan of the new royal blizzards – specifically the Brownie Peanut Butter one.

    • Although I’m not necessarily looking forward to winter, I am looking forward to the Candy Cane Oreo Blizzard coming back.

      Culver’s concrete mixers are stiff competition for the blizzard, though, and are BOGO in the afternoons at at least some locations.

      Cheers!
      -PoF

  • Makes a huge amount of sense from a high earner tax perspective I agree.

    I just can’t get over the idiosyncratic risk of a single stock. I get that it’s a diversified portfolio under the hood but no company is immune to fraud, accounting error, incompetence, regulatory scrutiny, class action suits etc.
    So I will continue to explicitly diversify in commingled funds.

    But enjoyable post – thanks!

  • Toby

    When I think of Omaha, after BRK, usually Omaha Steaks or Payton Manning (Omaha!) come to mind.

    Great post – I may have to buy some.

  • I agree that based on the tax implications of dividends, it is far more beneficial to have a company “buy back” their own stock rather than distribute and equivalent amount to their shareholders.

    Though, that doesn’t stop me from owning a few companies that do pay dividends. Plus, eventually my, “I’m a part owner of Disney, you’re really going to charge me to visit my own park?” will work eventually at the entrance, right?

  • I just bough all of the items you mentioned above, so your stock is about to sky rocket. The Blizzard Maker is a must have for sure!

    Hope you make it to the annual meeting soon. I am holding off on individual stocks until I am debt free (well maybe not mortgage free). It is a slow but steady climb.

    • Ha! You’ve just moved down a peg on the FI ladder if that’s true.

      Pro tip: sign up for DQ e-mails and you’ll get BOGO coupons for free blizzards monthly (except in summer, at least where I live).

      Cheers!
      -PoF

  • I almost bought Brk.b, but then realized one of my ETFs also holds it so I decided against it. I still might. I do hold a basket of individual stocks along with my ETF holdings. Up until this point, it certainly wouldn’t be one of my worst picks.

    Too bad ETF holders can’t be counted as direct share holders and get to go. :O)

  • dan

    “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 tripled 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.”

    POF,
    Just a minor point of clarification: If you had nearly tripled your money by investing in BRK’B in 2002, your return would be nearly 200% (not 300%). [Remember, if you double your money, your return is 100%….triple is 200%, etc.] Therefore, if you would have “nearly tripled your money” in Berkshire, you would have LOST to the S&P over that time period since it’s return with dividends was 261%.

    P.S. If the S&P index return during that period was listed/calculated to be 151.4%, then it was probably just the gross index numerical return which would not include dividends…but I’m just guessing.

    Dan

  • I’ll start by saying I like Berkshire. Buffet has done a good job of leveraging his positions to get better deals in his favor, preferred shares of bank of America anyone, and ensure management follows the right path. But.. I’ll also point out that being large conglomerate secures nothing. Exhibit A GE which currently seems to be circling the drain. Also there’s no telling what happens when buffet is no longer in power. How many of those deals hinge on his name for example. Ultimately I like Berkshire as they do a good job of instilling good management in companies they buy, but there is no magic bullet so I still don’t own them as a standalone stock.

    • Those who have believed in them over the decades have done very, very well, but that doesn’t mean the glory days will continue.

      For me, it’s worth holding a small amount for the annual meeting tickets if nothing else. The fact that it has appreciated over 20% in 13 months is a nice bonus, though.

      Cheers!
      -PoF

  • Hmm I find it hard to believe BH will go up right after Mr. Buffett passes. He is a certainly talented business man and investor, I’m not sure if anyone can repeat what he has done! Haha @ Woodstock for PF nerds, I watched his documentary and I thought wow, this guy’s a rockstar!

    • His explanation was there may be speculation of brekaup / spinoffs in the immediate days following his departure.

      That doesn’t say anything about the long-term health of the company, but they already have capable working alongside them. It will be interesting to see what happens over the years and decades to come.

      Best,
      -PoF

  • Axel

    POF,

    I’ve been reading your blog for about a year and WCI for way longer. We not only share the same specialty, but also the exact same reasons why I decided to buy Berkshire. I’ve owned my shares for about 6 months longer than you and I am happy to hold for the long haul, although I do have some fears of what would happen when one of them dies. Also looking to trek to Omaha at some point. Keep up the good writing!

  • I remember reading about Berkshire Hathaway in The Little Book that Beats the Market. And in it, the story of the woman who made a fortune buying A shares. Who knows what’ll happen when these guys kick it? Of course, I know a lady who just turned 109. It’s possible they’ll be around longer than we think. I hope so. I feel like the world’s a better place with Warren Buffett in it.

  • As you may know I own individual stocks. I own index funds. I own real estate.

    By the way, you also own individual stocks. The funds you own selected the stocks using some indexing criteria. I select the stocks myself using my indexing criteria.

    You may be surprised by this statement, but I also own BRK.B. I think that they will initiate a dividend in a few years or so.. Without Warren and Charlie ( who are rapidly depreciating), I do not have a high degree of confidence in the future.. On a go forward basis, I am not sure if your VTI would not do as well as BRK.B..

  • I concur with Dividend Growth Investor — a dividend within the next few years seems highly likely. From an interview with Morningstar’s Berkshire Hathaway analyst:

    DH: At the meeting, Buffett said he didn’t want to be sitting here three years from now with $150 billion. So do you think he’s opening the door for his successors, or do you think if Buffett is still in place in a couple of years and the cash continues to rise …

    GW: I think he’ll make the decision and I think the threshold is less than $150 billion, it’s probably in the $120 billion range. And I believe any dividend will probably be more of the special, one-time, nature, as opposed to an ongoing quarterly dividend. At this point, Berkshire could easily pay out $5 billion a year as a regular dividend. But I think the bigger advantage for Berkshire is to leave that option for the next guys, allowing them to say, “listen, we want you to be on the ride with us, come along and see how we can do with this business, and—by the way—we’re going to give you a one and one half percent yield.”

  • Was there a huge bump in purchases of BRK.B after this post? Just wondering…

  • This was a good post. I always read from personal finance bloggers how they only buy index funds. I think that is bad advice. You saw a return of 6.8% over the S&P. That is almost the same as the yearly S&P average return! Buying good quality stocks like Berkshire over the long term is always better than buying an Index Fund. An Index Fund lowers your risks and your returns. Buffett didn’t get rich from buying Index Funds!!!

  • I bought BRK this spring only because I wanted to attend the meeting before we lose Warren. I went for Warren but came away loving Charlie.

    It was well worth going–yay capitalism! Make a plan to go soon!

  • Back when I was making less than $50k a year, and BRK-B came out, I bought as many as I could afford: 7 shares.

    I didn’t know anything about stock picking or have an investment strategy to speak of. I just knew that every dollar I could scrape together would be well spent buying Berkshire Hathaway and darn if I don’t regret not buying more! The stock is up about 140% now 🙂

    For sentimental reasons, I haven’t sold it. And who knows, maybe one day soon I’ll be able to make time for the Omaha meeting.

  • Great intro, as I read it I started recognizing the names (it became obvious at Helzberg, See’s and then Net Jets)… WB’s shareholder letters are great fun reads (the beginning when we talks about the businesses, less fun as you get into the numbers and tables). I learned about the existence of reinsurance because of those letters.

    I am a proud owner of BRK.B and thought about going to Omaha but there are never any hotel rooms (or they’re absurd). It seems like a cool thing to go to but the logistics seem to be a nightmare too.

  • Charlie

    Hi PoF,

    Regarding the performance of BRK.

    Does BRK.B enjoy the identical rate of returns as BRK.A? I’m considering buying BRK.B, but was wondering if my yearly growth would be the same as shareholders of BRK.A

    Thank you!

  • BRK.B is my favorite holding. I have read all the annual letters back to the 70’s. This will make a great holding well into the future. The businesses packed inside are fantastic.

  • I hope you’ll be able to attend next year’s annual meeting. It would make for a unique and interesting experience – one that I’d definitely be interested in reading about!

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  • Gasem

    My kids are adopted orphans from China.

    I put $20K of BRK.B in a UTMA for each of my kids on their adoption day. It throws off no taxes, and grows like a weed. I never told them about it even after they turned 18. The problem with a UTMA is at 18 they “take possession” and can just go blow the money on a ‘Vet or something. My daughters have been living off the proceeds (not college expenses per se’ but things like food, travel, computers, iPhones, summer abroad etc) unbeknownst to them while in college ever since. It gives an extra $5-10K per year spending money for experiences. Once they finish college there will be money for a new car and a nice start in life. If I wanted I could just leave it in there, not tell them until they are 50 and they would have a retirement.

    I also own it in my taxable accounts.

    Yea Warren and Charlie

    • That was a smart move. I’ve been funding 529 Plans for our boys, but haven’t opted for the UTMA — mainly for the reason you mention. I don’t want them to learn to spend big before they’ve earned some money of their own.

      Cheers!
      -PoF

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