Is Berkshire Hathaway Stock a Better Buy Than an S&P 500 Index Fund?

Experienced investors know the advantages of buying and holding S&P 500 index funds like the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). Not only are they super simple, but statistically speaking, you're likely to get better performance from them than you are by picking individual stocks or by owning an actively managed fund.

Nevertheless, given its long-term (and often market-beating) track record, even the most disciplined of investors might have the itch to step into a stake in Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB). But is it actually the better buy?

What Berkshire Hathaway is

Berkshire Hathaway is a conglomerate consisting of several dozen reliable cash-producing businesses as well as a portfolio of hand-picked stocks. Brought to prominence by Warren Buffett, the company's flexible structure has enabled its shares to consistently outperform the S&P 500 since Buffett first took the helm in 1965.

It hasn't beaten the market every year since then, to be clear. Some years it did. Other years it didn't. It typically achieved the feat in five-year time frames.

BRK.B data by YCharts

It's happening less and less, however, now that the conglomerate has reached its enormous market value of $1.1 trillion. As Buffett warned in 2023's letter to Berkshire shareholders posted in early 2024, "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others ... all in all, we have no possibility of eye-popping performance."

And that should concern interested investors. The question is, is it true?

The argument

There may be a good reason for you to own either, or neither, or both. For most investors looking for a long-term growth holding right now, however, Berkshire is arguably the better bet, for a couple of reasons.

One of these reasons is the S&P 500's overall valuation. Although it's mostly due to a handful of very large technology stocks, the index's forward-looking price-to-earnings ratio of more than 20 is well above norms. The underlying expected earnings growth largely depends on the continued growth of an artificial intelligence industry that may run into a headwind sooner rather than later, too.

Indeed, this valuation and lofty earnings expectations are at least part of the reason that both Vanguard and Goldman Sachs expect the S&P 500 to earn an average annual return of between 6% and 7% for the next 10 years versus its long-term average annual gain of 10%. If this outlook is on target, stocks don't offer much reward for their risk.

Image source: Getty Images.

The other component of the argument for owning Berkshire rather than an S&P 500 index fund for the foreseeable future is that, if nothing else, Berkshire's wholly owned businesses are reliable cash cows, on pace to generate nearly $50 billion in net earnings this year alone. With most of the stock market's foreseeable future being so uncertain, this cash flow becomes an incredibly valuable attribute.

Just some food for thought.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Goldman Sachs Group. The Motley Fool has a disclosure policy.