A Recommendation

My aunt was asking me whether she should put her money in mutual funds investing internationally or Berkshire. My answer was Berkshire. I'm posting it here so that I can look back in the future some of the factors that I had in mind for Berkshire. Here's a reprint of the email...

Aunt _______,


Well if you're too lazy to read, make ________ read it. I'm sure you can force it on him :)
Ofcourse, if i recommend something to you, i can be wrong. So it's your own risk :)


I strongly recommend berkshire hathaway B shares over any mutual funds whether American or international because of the ff factors:


1.) Cheapest expense ratio for mutual funds amount to .25% but with Berkshire, the expense ratio is equivalent to less than .0015%. There's virtually no expense.


2.) Berkshire has a better portfolio of companies both public and private companies than any mutual funds plus they have access (or network) to more investment opportunities than mutual funds. Mutual funds can only invest in public companies locally and internationally, berkshire can invest in both public and private, local and international.


3.) The biggest advantage in my opinion that berkshire has over any other mutual funds is that berkshire has leverage. For every dollar that you put, berkshire gives you about two dollars to invest for you. They "borrow" and use other people's money that they acquire from their insurance premiums to invest. There are many hedge funds that are loaded with debt but with berkshire, the "debt" from insurance premium that they have is "interest" free. It is interest free because the premiums they receive is always greater than the claims of the insurer. If you're a little concerned about Berkshire's credit quality, maybe you can take comfort in the fact that it is one of the 10 companies in the USA to have a AAA credit rating.


4.) Would you rather have a professional mutual fund manager invest for you or would you rather have Warren Buffett and Charlie Munger (who i think is the smarter of the two) invest for you?



5.) Berkshire has lots of tax advantage over the typical mutual fund. The deferred tax along with the insurance premium is another source of Berkshire's leverage. Because of the huge amount of interest free leverage that Berkshire has from their insurance premiums and tax liability, Berkshire has very low debt from banks.


6.) Berkshire is selling at a discount to its fair value at present.
I do believe that index funds or mutual funds with very low expenses and long term focus are good investments. However, I think that realistically, they have a hard time beating berkshire not because of Warren Buffett alone, but because berkshire is equipped with lots of advantages such as the leverage, portfolio and access to more investment opportunities.



A more simple analogy i can give is that mutual fund managers are driving a car to get somewhere whereas Warren Buffett flies an airplane. He is better equipped than mutual fund managers.


I'm putting my money where my mouth is.



Did anything i wrote here made any sense?