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Berkshire Hathaway Is Not an Index Fund, So Don't Expect It to Act Like One

Warren Buffett (Trades, Portfolio) has attracted a lot of criticism for his lack of action in the March stock market crash and subsequent bounce back. Critics have attacked his decision to sell airline holdings, and his decision not to increase major equity investments in the first quarter.


I should note at this stage that the information we have on Buffett's transactions for this year is, so far, limited. We don't know yet if he's made any moves in the second quarter. On that basis, I think some of the criticism that has been leveled at the Oracle of Omaha this year is nothing but over-excited hype.

What's more, the coronavirus crisis is far from over. It could take a turn for the worst later this year. If it does, Buffett's decision to wait on the sidelines will look very smart indeed.

Still, saying that Buffett has missed the rally and is out of touch with the market is entirely misleading. A deeper look at his portfolio shows why this is the case.

Big holdings

Buffett's critics, who have been attacking the billionaire investor for his lack of exposure to key growth sectors, seem to be forgetting that Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) most substantial single stock investment is Apple Inc. (NASDAQ:AAPL).

At the end of 2019, Berkshire owned 5.7% of Apple, or just over 250 million shares. The consumer electronics company has been one of the best-performing stocks on the market this year. Year to date, the stock is up just under 18%.

On that basis, this position, which was worth just under $74 billion at the end of 2019, is worth nearly $84 billion today. These gains have easily offset the losses of Berkshire's second- and third-largest (as of the end of 2019) positions, Coca-Cola (NYSE:KO) and Bank of America (NYSE:BAC).

That said, Apple is only one stock. The rest of the portfolio has been very mixed. But there's a more significant point to make here. Analysts have been attacking Buffett for not beating the market, although that's never really been his objective.

Not an index fund

For years, the investor has been warning that as Berkshire grows, the group's returns will fall. The probability of the Oracle being able to time the market perfectly and pick the perfect stocks was always slim.

It's important to remember that Berkshire is just one company. It is not an index fund. If you want to own the market, it makes sense to go and buy an index fund. Indeed, that's something even Buffett himself has advocated. Moreover, if you want to own high-growth tech stocks, owning a tech fund might be sensible.

Berkshire has never claimed to be a tech fund, so it seems silly to suggest that Buffett should be acting as a tech investor. The principal aim of the group is to grow and protect shareholders' capital.

That's what Buffett has been doing, and that's why Berkshire will always remain an excellent investment.

However, investors should never look at this as a one-stop shop for investment success. Like any stock, Berkshire should be owned as part of a diversified portfolio. That's the key here. For example, Berkshire could be owned as part of a portfolio of tech stocks. That would provide some downside protection, as well as exposure to the market's fastest-growing sectors. It all depends on where your circle of competence lies, and what you're comfortable owning.

So overall, attacking Buffett for his lack of exposure to tech does not make sense. That's not what Berkshire is about, and it has never been. The group is strong in other areas, so it is sensible to concentrate on those.

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.