During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed $BRK.B Berkshire Versus S&P 500. Here’s an excerpt from the episode:
Tobias: Berkshire versus S&P 500.
Bill: I don’t know.
Tobias: Anybody want to take a go with that?
Jake: Looking backwards or forwards?
Tobias: From here, which one would you rather own?
Bill: I think Berkshire’s got a real shot because I think Ted and Todd are going to evolve the business in a positive manner. And I think that you give me a company that has that ethos and that focus on capital allocation, and over time, it’ll work out well. I don’t know that I love the current collection of businesses versus the businesses in the S&P, but then you’ve got valuation. If this Apple valuation is real, the rest of Berkshire is dirt cheap, in my opinion. I guess over a long-enough time horizon, maybe S&P gets it, but I think that they’ll be able to evolve in a way where they would be able to catch whatever the S&P would be able to catch on them, if that makes any sense.
Bill: I agree. In my mind, it’s a bit of a function of cash flow now versus story of cash flow later. If the story still matters more than the actual cash flow, if the two birds in the bush continue to be worth more than the one in the hand, then Berkshire lags the S&P. However, if for whatever reason, that world goes back to that, whether that means interest rates are higher or whatever, who knows, then, Berkshire has a lot of birds in the hand today already, and they look pretty cheap and attractive right here.
The S&P, I would say– there’s that chart about how the biggest five companies have carried all the returns basically over the last five years. If you don’t get that kind of amazing repeat performance out of them, which goes against a lot of base rates, not impossible–
Tobias: Is that unusual for the S&P 500 to be that driven by a handful of companies? Isn’t that the way it always is?
Jake: I don’t know how that changes historically and how this is relative. You hear about time periods, which make you think that this is an odd time, late 1960s, where it was the NIFTY 50, we’re carrying it. I don’t know.
Tobias: What about the fact that Warren has said S&P 500?
Bill: Well, I don’t know that he said that.
Jake: He said it, but he didn’t do it.
Bill: And I think he just means if you don’t want to pay attention– you’re going to have to watch Berkshire, you’ve got to watch how these guys invest. What I’ll tell you is, like the Kroger investment, I know that it’s not that sexy, that was a pretty good investment. That Restoration Hardware investment when they made it, that required a lot of creativity. They’re getting early on Snowflake. I get that maybe some of that stuff doesn’t make some of the people that are used to the Buffett-type investments that excited but it does indicate that the way that the company may evolve could really surprise some people. That utility business is so damn good and Geico is so good and the insurance business is so competitively advantaged that–
Jake: –railroad too, I think is like– [crosstalk]
Bill: Yeah, that’s right.
Jake: That’s north of $100 billion, right?
Bill: Yeah. I get why people think that it’s too big. I’ve said it too at times. I’m looking at my portfolio right now, it’s the biggest position I have. So, I obviously believe–
Jake: So, you don’t really have to say anything else. [chuckles]
Tobias: I think when you look at Berkshire versus the S&P 500, it’s got a higher return on invested capital than the S&P 500 and it trades more cheaply. So, for me, it’s easy that it’s going to be Berkshire. Who knows really what happens with– There’s lots of silly things can happen with the share price. But in terms of the fundamentals, I think it’s Berkshire.
Bill: Well, what somebody would say to you, though, is like five years out the return on the invested capital of the S&P is going to exceed Berkshire because the software that grows. That would be the devil’s advocate argument. I don’t know. [crosstalk]
Tobias: Let’s see.
Jake: Only because you’re overstating return on invested capital because you’re not counting all the intangible capital.
Tobias: Yeah, let’s see. And then, I think that I prefer Ted and Todd to the S&P 500 committee and as evidence for that, I’ll give you the fact that the S&P 500 didn’t include Tesla.
Jake: [laughs] Idiots.
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