Could Buying Berkshire Hathaway Today Set You Up for Life?

Even investors only interested in scintillating growth stocks can acknowledge that Warren Buffett's value-minded approach has its merits. His Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has consistently outperformed the S&P 500 index (SNPINDEX: ^GSPC), after all, given enough time.

But one can't help but wonder if too many investors are underestimating the true potential of Berkshire Hathaway. Might it be quietly capable of setting you up for life by dishing out oversized long-term gains?

Maybe.

The Berkshire Hathaway you don't know

There's the Berkshire you know; it holds stakes in a bunch of publicly traded companies including Apple, Coca-Cola, and Bank of America. You may have even poached a few of these picks for yourself from time to time.

Then there's the Berkshire you may not know. The conglomerate also owns a slew of privately held business like Duracell batteries, Shaw flooring, Geico insurance, Clayton mobile homes, and Acme brick company just to name a few. Some of these outfits work with one another. Others stand alone. All of them, however, ultimately contribute cash to Berkshire Hathaway's bottom line. It banked $37.4 billion worth of operating earnings in fairly typical 2023, not counting the gains on its stock holdings.

You should also know that Buffett is opting to simply sit on an ever-growing cash hoard rather than investing it in private or publicly traded outfits. As of the end of Q3, Berkshire boasted $325 billion worth of cash or cash-like investments -- roughly one-third of the conglomerate's current value -- as Warren Buffett and his lieutenants can't find anything they like well enough to add to Berkshire's portfolio at this time.

This is where things get interesting.

Berkshire's approach clearly works better

In many regards Berkshire Hathaway is like a traditional mutual fund, or even an actively managed exchange-traded fund (or ETF). That is, its managers hand-pick stocks and have discretion as to if and when to sell them.

The fact is, however, Berkshire is less like a mutual fund than perceived.

How so? Most ordinary funds operate under policies that require a minimum amount of diversification by limiting the relative size of any single holding, for instance, but Berkshire doesn't. In fact, Buffett concedes he doesn't worry much about diversifying the portfolio. He simply buys into companies he likes. Many traditional mutual funds also make a point of remaining mostly invested, even if its managers know there aren't many great opportunities due to a lousy economic backdrop. Again, Berkshire has no such problematic rule.

Finally, although it's not unheard of for a fund to invest in a private business, in most instances funds will limit themselves to publicly traded companies. Berkshire Hathaway enjoys being able to access privately held opportunities that aren't otherwise available to ordinary investors.

In other words, Berkshire invests in a way most individuals would probably prefer to if given the option. It also invests in ways that most mutual fund managers simply can't.

And this makes a stark difference in its long-term results.

Although they're well trained and well paid, the average mutual fund manager doesn't actually outperform the broad market. Data regularly updated by Standard & Poor's indicates that over the course of the past five years, 77% of large-cap mutual funds available to U.S. investors underperformed the S&P 500. Things don't get much better with different market caps or different time frames, either.

Now care to guess who or what has outperformed the S&P 500 for the past five years?

If you guessed Berkshire Hathaway, you're right. Indeed, Berkshire has regularly led the market for several decades now despite hitting the occasional soft patch. Berkshire Hathaway's gains have been about double those of the S&P 500, in fact, for almost any long-term time frame between the 1990s and now.

BRK.A Total Return Level data by YCharts

Chalk this market-leading strength up to a combination of stock-picking savvy, patience, and ample investment flexibility most amateur and professional investors alike just don't have.

Realistic expectations

The question remains, however...can Berkshire Hathaway set you up for life? The answer largely depends on what it means to "set you up for life."

If you're looking to turn $10,000 into $5 million in less than 30 years, no, Berkshire isn't apt to do that. Over the course of 30 years, this stock has averaged annual gains that are only slightly better than the S&P 500's. Its market-beating performance is mostly the result of outperforming the market by just a little bit on a consistent basis; the nickels and dimes add up.

If turning $50,000 into $1.7 million in 30 years' time is life-changing for you, though, not only is it possible, it's probable. Berkshire Hathaway's done it!

BRK.A Total Return Level data by YCharts

Giving such a position enough time is of course the key. The longer you hold a winning stock, the more valuable it becomes -- and the bigger the dollar gains become from a given percentage rise in the share price. You've just got to be willing to stick with the trade early on, when even fairly large percentage gains don't always add up to a big increase in the dollar value of your investment.

Expecting a long-term position in Berkshire Hathaway to beat the market also presumes it will continue operating in the future as it has in the past. If its stock-picking approach and management of so many privately owned businesses changes, a rethinking of its actual long-term upside is merited.

Until that actually happens, Berkshire remains a great pick with true millionaire-making potential for patient investors that can commit a fair amount of money to investing.

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Bank of America is an advertising partner of Motley Fool Money. James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.