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Investors love to follow what stock Warren Buffett and his team buy for his holding company, Berkshire Hathaway. His stock picks make waves in the investing world and can move the entire market.

But not all of his picks become popular stocks or become long-term winners. And even though he’s rigorous about researching companies he wants to invest in and has said his favorite holding period is “forever,” when the time is right, he has no qualms about selling.

Although he gives out advice freely and frankly, he rarely gives details about specific stocks. But there’s one investment he’s told followers over and over again to put their money in and to never bet against, and it just did something in 2023 that should give investors some confidence about its future.

The American tailwind

The investment I’m talking about isn’t Apple, Coca-Cola, or Berkshire Hathaway stock itself. It’s the S&P 500, and outside the individual stocks in the Berkshire Hathaway portfolio, Berkshire owns 43,000 shares of the Vanguard S&P 500 ETF (NYSEMKT: VOO). That’s worth around $17 million at today’s price, a drop in the bucket of the entire portfolio that’s worth about $346 billion today.

Berkshire Hathaway isn’t an amateur investor. It’s very actively invested. So why does it own index funds?

It’s not easy to beat the market, even though Buffett has done it. In bull markets, more than 80% of actively invested mutual funds could underperform the market. In 2021, 85% underperformed. Not surprisingly, it’s easier to beat the market when the market is down, and only 54% of actively invested mutual funds underperformed the S&P 500 in 2022. That’s still more than half.

In his most recent shareholder letter, Buffett described what he calls “the American tailwind.” It’s not the first time he’s talked about his confidence in the future of the U.S., and he attributed his company’s success to the promise and initiative of the country.

Don’t bet against the market

The S&P 500 is a collection of some of the largest, most popular companies in the U.S., and altogether they drive a huge amount of the American economy. These are the companies that will be around in the future and drive economic recovery, as well as create new opportunities and future growth.

Buffett said: “I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.” To that end, he has said that he’s putting 90% of his individual portfolio into index funds for his wife after he dies.

Buffett actually made a bet with a large, well-known hedge fund to test out how well investing in an S&P 500 index fund stacks up against elite stock pickers. Buffett and five select fund managers each invested the same amount over 10 years, Buffett in an index fund, and the five managers each chose their stocks, buying and selling over the time frame.

These were the results, ended in 2017:

Fund A
Fund B
Fund C
Fund D
Fund E
Index fund

Final gain

Average annual gain

Data source: Berkshire Hathaway letter to shareholders, 2017.

Is the market making a comeback?

Getting back to what the market did, it just posted its best week of 2023. The year started on a high note, with investors pushing up the market to within striking distance of ending the bear market. But after gloomy economic reports and no easing up on interest rates, the market fell.

However, the most recent slate of company earnings reports illustrated that the economy is doing better than expected, and the market rallied last week. Many individual stocks soared, and the S&P 500 is now up 15% year to date.

We don’t know where the market is going next, but if history is any guide it will continue to rise and create wealth over time. Even if you are choosing your own stocks, it’s a good idea to having some funds put away in an index fund or ETF to further diversify your holdings and provide value. If you haven’t done this yet, now is a great time.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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