 Good day, fellow investors. Today I'm going to give you five reasons why I firmly believe Berkshire Hattaway stock is much, much better than the SAP 500 index. So if you're an American, if you want exposure to American stocks, Berkshire is better than the SAP 500 and I'll give you five reasons for that. In this video, we will compare the performance of the SAP 500 versus Berkshire. We will compare investment strategies, which is the first advantage for Berkshire, index funds buy high and sell low while Berkshire does the opposite. We'll compare the valuation, price to book, return on invested capital and shareholder value creation and then we'll conclude and you will see why Berkshire will beat the SAP 500 in the next 10 years, 20 years. Now you will say, okay, but the SAP did so good over the last 10 years and it destroyed Berkshire. Yes, that is 10 years, but give Buffett the benefit of a full market cycle. In the last 10 years, amazing performance by the SAP 500, but the reason behind this is obvious. Quantitative easing and lower interest rates. Just take a look at the federal funds rate. It has been close to zero for seven years and just now it has started to go slightly, slightly up. So this is the reason why stocks did very, very well. Further, there is a mania about index funds, SAP 500, all you have to do in your life is just invest in index funds and don't have to think about anything else. I think that's wrong, but the past 10 years prove me wrong for now. We'll see how it will end up in the long term. Let's see. So also the SAP 500, the full chart, the line is from the lower line is Berkshire, the brownish line has outperformed Berkshire over the last 10 years. When you add the dividends onto that, the outperformance is really, really big over the last 10 years. However, this perspective only uses 10 years, which is one part of the stock market cycle. So this is just the bull market, the last bull market. If we had the bear market, then things change significantly. So if I go just to 2006, this is the comparison between the SAP 500, the full chart and the brown line for Berkshire. Return for Berkshire almost 250%. Now the SAP 500, 114%. Add, well, 40, 50% of dividends onto that and the SAP has underperformed Berkshire. If I go back a little bit more to 2003, the outperformance for Berkshire really, really increases. So if I go even a little bit more 20 years, Berkshire has destroyed the SAP 500. And I believe Berkshire will do that again in the future. 10,000 invested in 1997 in Berkshire would be around 58,000 in the SAP 500 when I add the dividends, which make almost 40% of the return close to 30,000. But just past long-term performance is not my argument why Berkshire will outperform the SAP 500. Let me show you five arguments. Why will that be that are better than just past performance? Because past performance is no indication of future performance. These five arguments are an indication of future stock market performance. My first argument is index funds are market weighted investments. So they buy the stock that has the largest market capitalization while Buffett does the opposite. Buffett likes to buy low and then keep the quality businesses that he bought low, getting the dividends practically forever, while SAP 500 indexes buy the hottest stock with the largest market capitalization. And then when that turns down, they have to sell that and buy something else that is hot. So let me elaborate on the first argument. If I look at the portfolio of the SAP 500 index, the largest company, Apple, of course Buffett is also buying Apple, but he's not buying Microsoft, Amazon, Berkshire is also there, but already just 1.73% of the stock market weight. Then other stocks. So index funds always buy the largest market capitalizations. And when you invest in an index fund, you're buying the largest stocks. If we look at Buffett's portfolio, it is a little bit different. Of course, he has Apple because he thinks it's a good investment, American Express, Bank of America. And that's another reason why Buffett will outperform how he got to that Bank of America. We'll talk in a second. Kraft Heinz, Coca-Cola and Wells Fargo. So first, you get just 4% of Apple in an index funds with Buffett. That is a little bit higher as he has 25% of his stock market portfolio in Apple. And then the rest, the majority in other 5 big stocks. So he is really focused, okay, this is a good company. This is a great business at a fair price. I'm really putting a lot of money into that. He's not buying everything and he's not buying the bad. Further, Buffett can make special deals to acquire companies at a very, very low price, which index funds can't do. Let's see how he got to the big position in Bank of America. So Buffett invests 5 billion in Bank of America August 25, 2011. Okay, you say he bought stocks early. No, he didn't buy stocks. He bought preferred stocks that pay 6% annual dividend. And he will, he received warrants for 700 million shares that it can exercise over the next 10 years. Of course, this was already in 2017, 12 billion made. Now we are at 14 billion made. So that's one. He buys low. He keeps for long term. He gets the dividends. He can make special deals. Index funds do the opposite. So that's one argument. The second argument to buy low, Buffett is disciplined. He's stashing cash and he's patient and he waits for opportunities to come to him. Index funds chase stocks as those go higher, go higher as people put more money into index funds. They simply have to buy what is out there. So there is no common sense application in index funds. Buffett Berkshire is all about common sense. This is the current growing stockpile, 111 billion in cash at the end of the second quarter waiting for new opportunities to come. Perhaps in the next recession, as JP Morgan said, that will come in the next two years. So number two, you don't have to time the market. Buffett will do that for you. And I think that Buffett and Berkshire will do that better than you can do it by yourself. So they have the cash. They will deploy that cash at a high return on investment as they have been doing in the past. The high return on investment is the third argument I have for Berkshire Hathaway. Also with the discipline, Berkshire bought Burlington Northern Santa Fe in 2009 for 45 billion. And since 2011, he has been getting dividends of about 3.5 billion on debt. So a 10% dividend yield on his investment. That is what his patience leads to, which leads to higher high returns on investment capital. Now he's getting 3% from treasuries. He will deploy that at 10% in the meantime he's waiting. As I said, with the SAP 500, you buy high and sell low. Look at what you buy. These are the top holdings now. But let's just look at what were the top holdings in 2014. Exxon is out, General Electric is out, Chevron is out. So you were buying oil stocks at their peak. At peak oil, you were putting into such stocks. That's something that Buffett didn't do and doesn't do. If we go a little bit more back in history, 2008, six stocks here are not anymore in the index. So you really again buy those hot stocks and you don't buy the growing, the powerful, the great businesses that will come into the SAP 500 in the future. If I go back to 1999, Microsoft was the leader with 600 billion market cap. Now it's just around 800 billion. So that's 25% increase over 20 years. The other nine are not included in the SAP 500. So that's what I mean, buying high and selling low. So you're buying Lucent, Citigroup. Just Google how did those companies, American Online, fair in the last 20 years. So Buffett is not buying the bad, while index funds are always buying the bad. Number four, when you buy index funds, you, as I said already 20 times, you buy everything, the hottest stock, what the general market thinks are the hottest stocks. You are not investing in startups. Buffett can and he is investing in startups. So even better diversification and he's doing that for you. If we look at the sectors of the SAP 500 index, 15.21% is in healthcare. What is Buffett doing with some guys, Bezos and Demon from some companies, Amazon and JPMorgan, he is starting a healthcare business that will probably displace the healthcare industry over the next 10, 20 years. So at very low cost, the next Amazon of healthcare is being built by Buffett with his power, with his connection. So you have a startup that's set up by Berkshire, Amazon, JPMorgan versus old companies that are set up in an old structure in an old business model with 15% of exposure for the SAP 500. Who will do better? What do you think? So that's another argument for Berkshire. And then number five, extremely important fundamentals. We will compare the valuation, the price to book, return on investment capital, and then you'll see how even on the fundamental side Berkshire has a great advantage. Valuation, Berkshire, price to earnings ratio, okay, 10, that's because of taxes. So forward is 18, that's something we can use, current SAP 500 P ratio 22 forward, also 18. So valuation is equal. Okay, let's take it at that. Price to sales ratio, Berkshire 2.16, SAP 500, 2.14. So that's even equal. However, price to book value, SAP 500, 3.32, Berkshire 1.43. So if you buy Berkshire now, you pay 43% over the real value of the assets. If you buy the SAP 500, you pay you pay 3.2 times the value of the assets. So those assets are the long term value that book value is the long term quality that will lead to long term earnings. And a return on the invested capital is what drives the market, the earnings yield, the dividends that gives the potential for that. The discrepancy between Berkshire and the SAP 500 is another key that will allow Berkshire to outperform the index. Let me show you this. Over the past 10 years, the SAP 500 book value went from 530 to 833. When I add 400 points of dividends on top of that, I am at return on book value of 8.8% per year, which is not bad. But if I look at Berkshire, the book value went from 70,000 to 218,000, which is 12% return on capital per year. So Buffett has the book value, which returns 12%, SAP 500 return 8%, that 4% is an amazing difference. It's a huge difference. Plus, you are getting Berkshire's book value, Berkshire's capital at a 50% discount than what you get at index funds. So 4 percentage points higher return plus 50% discount rate. That's a big, big discrepancy that will be seen in the next 10-20 years. Further, what is Buffett doing? He's waiting patiently with 3%, getting the 3% and keeping his money to invest it to deploy it when there will be opportunities for 10% and higher. What are SAP 500 companies doing with your capital, with your money? They are buying extremely expensive stocks with buybacks. If we look at the SAP 500 buybacks, you can see that when stocks are at the highest level, when everything is just about to crash, then SAP 500 companies jump into doing buybacks to push stock prices higher to get more option and to screw shareholders. So that's what they are doing. What is Buffett doing? He is buying on the low like he did with Burlington Santa Fe. He waits for opportunities and he waits with cash. He accumulates cash to deploy that significantly to shoot another elephant like he likes to say in 2019 or 2020. On diversification, the SAP 500 is diversified, but Berkshire is also diversified. You have insurance, utilities, energy, manufacturing and other, a big part with all the stocks and the smaller businesses from Seescandy to other, plus Burlington. So again, you get the diversification too. So to conclude, I really think that investing in Berkshire, dollar cost averaging in Berkshire over time will lead to higher returns than the SAP 500, like it was the case over the past 20 years. I don't think we will have to wait another 20 years to see that divergence, probably just 10 years, especially if we see more volatility in the markets, a recession. So that's why if you're invested in the SAP 500, I would urge you to really look at Berkshire and see about the mindset when it comes to investing in index funds or in Berkshire. Buffett never said to invest in Berkshire because he leaves that to you, but I think we should do what he does and not what he says and invest in Berkshire if you are a passive investor. So if you like this different mindset, the common sense mindset and the value investing mindset to investing, please subscribe this to this channel as we do that. We analyze companies from that perspective and we try to look at the common sense of investing that will lead to great returns over the long term. Am I invested in Berkshire at the moment? Not because I don't like the high valuation and I see the risk of a recession hitting America and the American stock market. I will buy Berkshire probably when it is much, much cheaper and people don't like it that much as they are now. However, I still think it's better than the SAP 500. On what I do, please check my stock market research platform. I look for higher earnings yields, higher return on invested capital around the world where there are many, many sectors that are cheap, let's say bargains, not fairly valued or overvalued like the SAP 500 is. Thank you for watching. Don't forget to subscribe, check my other videos and I'll see you in the next video.