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What Makes Berkshire Hathaway Shares Better Than an Actively Managed Mutual Fund?

Motley Fool Staff, The Motley Fool

If you were to take a course titled "Investing 101," one of the early topics covered would certainly be diversification. Holding an array of good stocks in your portfolio is a wise way to hedge against company- or industry-specific risks. And your professor would no doubt mention that a simple way to achieve that diversification -- if you're not ready to do the research and pick a few dozen stocks yourself -- is to put some money into a low-fee index fund. These passive funds outperform the large majority of actively managed funds, which makes them a safer bet.

All of which is a necessary prologue to the interesting question posed by listener Tony in this segment of the Motley Fool Answers mailbag episode. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), and the less-known Markel, are conglomerates that also hold significant stakes in other companies' stocks. So how is investing in a company that largely is a curated stock portfolio any different from buying an actively managed fund? Hosts Alison Southwick and Robert Brokamp -- along with their guest, Buck Hartzell, the Fool's director of investor learning and operations -- explain.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 30, 2019.

Alison Southwick: The first question comes from Tony. "I often hear Motley Fool hosts discussing Berkshire Hathaway and Markel as companies that invest in other companies and produce a nice annual return for shareholders. But since they buy stock in other companies, aren't they like buying an actively managed mutual fund instead of an individual company?"

Buck Hartzell: A great question, Tony! Yes, when you look at Berkshire and Markel, they're both diversified companies, but they're different. Berkshire is really big. They're an over $500 billion company. Just to give an example, one little piece of Berkshire Hathaway owns about $200 billion worth of publicly traded stocks. These are huge companies like Heinz, Kraft, Wells Fargo, and American Express and they own big stakes in them. Markel is like a $14 billion company, so 500 vs. 14.

I'd say Berkshire is larger and more diversified than Markel is, but they both are doing the same thing. They own whole other companies in diversified revenue streams and I think they're a good idea to have in one's portfolio in addition to the S&P 500. As a matter of fact, if you look over the last few years at the performance of the S&P 500 in aggregate how much revenues grew and profits, Berkshire has grown much faster, their performance has grown much better, and I actually like them better than the S&P 500, although [they're] not quite as diversified and they trade about like the financials ETF.

You'll find them go down. In 2008-2009, when the financial ETF went down about 37%, so did Berkshire Hathaway. It trades with it, but the business did much better. I like the idea of having some Berkshire Hathaway or Markel in your portfolio. I think right now Berkshire is a little bit cheaper, so maybe that's a good choice for you if you don't mind having a company instead of just the S&P 500.

Southwick: With Berkshire there's always a lot of concern with Buffett. It's all about Buffett.

Robert Brokamp: He's now 88.

Southwick: So there's good reason to have some concern that he maybe is not going to live forever. Maybe he is the Night King. I don't know.

Hartzell: Do the actuarial tables say that?

Southwick: [laughs] Is Markel similar in how it's structured? Is there one person at the top?

Hartzell: Well, it's similar in that it's been in the Markel family for a long time. It's a third generation, now, that's running it but their next group of leaders is already in place and running the business. So co-CEOs Richie Whitt and Tom Gayner are in their 50s. They're running the businesses while they're overseen by Steven and Tony Markel and Mr. Kirshner who was the CEO before, so they have a younger group.

I would also stress that nobody's as good as Warren Buffett is, and that's a fact, but he's not running all the individual businesses. Those are all run by great people and now they're overseen by Greg Abel and Ajit Jain. Ajit is going to run the insurance businesses and Greg will oversee the other businesses that they have. These are very capable, great people that they have in place, and all those people running those other businesses have done it themselves. Buffett has basically allocated the capital and a few years ago he hired people to help with that, too, so they're getting more. The bench strength is really strong there.

Does anybody want to see Warren Buffett go? No. But the people that are behind him are more than capable and Berkshire will do just fine. I think that's overblown a little bit.

Brokamp: The only thing I'll add is if you really are considering owning one of these stocks, or both of these stocks vs. an actively managed fund, just know that if you buy the stocks you just pay the commission and that's it. You don't pay any actively managed fee which is anywhere from 0.7% to 1%. Actively managed funds are not very tax-efficient, so if you were looking for money outside of an IRA or a 401(k), one of these stocks would be worth considering and I should say that I own both of them.

Hartzell: I own both of them, as well.

Southwick: I own neither.

Alison Southwick has no position in any of the stocks mentioned. Buck Hartzell owns shares of Berkshire Hathaway (A shares), Berkshire Hathaway (B shares), and MKL. Robert Brokamp, CFP owns shares of Berkshire Hathaway (B shares), KHC, and MKL. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and MKL. The Motley Fool has a disclosure policy.