The late Charlie Munger was a legendary investing guru, the yin to Warren Buffett's yang. And some ETFs can help you invest like Warren Buffett and Munger.
Munger and the Oracle of Omaha built a successful long-term portfolio for Berkshire Hathaway by buying and holding great companies trading at attractive valuations such as Coca-Cola and American Express.
But in the past few years, Munger and Buffett adapted and Berkshire altered its strategy a bit, adding more tech and growth companies to the mix as well, a strategy that has led to big investments in Apple as well as smaller positions in Amazon.com and cloud software firm Snowflake. Munger's own firm, newspaper publisher Daily Journal, even has a stake in Chinese e-commerce and cloud giant Alibaba.
So how can ordinary investors try and replicate the Munger and Buffett playbook?
Finding Best ETFs To Invest Like Warren Buffett
Bill Stone is chief investment officer of Glenview Trust Company, a money management firm with about $20 billion in assets. He told IBD that looking for funds that invest in quality companies is key. Quality is important even if the stocks don't trade at dirt cheap valuations. Munger often noted that investing in great businesses at a fair price made more sense than a fair business at a great price.
Glenview is a longtime Berkshire shareholder. And Stone has been to his fair share of annual meetings in Omaha to watch Buffett and Munger discuss the markets.
"Munger was a phenomenal intellectual giant. To not have him around for Buffett to bounce things off of is a loss," Stone said. "But Berkshire is set up to run for the long-term well after both Munger and Buffett are gone."
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Stone said that investing like Berkshire Hathaway may be more of a challenge in 2024, however. "I was more optimistic at the end of 2022," he told IBD. "Everything I look at, the market is pricing in a pretty high probability that the Federal Reserve can manage a soft landing. I worry that expectations are higher and so much has to go right."
With that in mind, here are three Berkshire-like ETFs that Stone thinks investors should be considering for this year. They have the right mix of top companies trading at reasonable prices that should be able to weather any hiccups for the market and economy.
Own The S&P 500 Index
There's no shame in owning a plain vanilla S&P 500 index fund in order to take advantage of broader market gains. Stone noted that the always colorful Munger said the following about index funds at the 2023 Daily Journal shareholder meeting, Munger's last. "It's not difficult to just buy an index fund and sit. That's the great default position," he said.
Numerous asset managers have S&P 500 index funds. But Berkshire Hathaway has chosen the Vanguard option for its investors. As of the end of the third quarter, Berkshire Hathaway had a stake in Vanguard 500 Index Fund that was worth about $17 million.
Stone said that VOO is "super cheap and super tax efficient and that it's a "nice solution" for investors who want exposure to the broader market without having to do much.
Broaden Out A Little
The Avantis US Equity fund, at first blush, looks like an average S&P 500 index fund. Apple, Microsoft and Amazon are top holdings. There's a big position in Berkshire Hathaway as well.
But dig deeper and you'll see that the fund has more than 2,000 stocks in it. That gives it much wider exposure to the U.S. market than your standard index fund. The fund also owns midcaps and small caps such as Yelp and PetMed Express for example.
Stone said he likes the approach that the fund's managers, who were veterans at quantitative investing giant Dimensional Fund Advisors before starting Avantis, take to running the fund. The fund's strategy is "systematic but active," Stone said.
The fund looks beyond traditional price-to-earnings ratios and focuses more on book-to-market values and cash-based profitability. That allows the fund's managers to strip out companies that might look cheap but are using accounting tricks to boost earnings. Stone said that the ETF mirrors what Munger and Berkshire have done over the past few years, "shifting from just buying cheap stocks to growth at reasonable price."
The strategy has paid dividends, with the fund posting average returns of 10% annually over the past three years, compared to 8% gains for the ETF's benchmark, the Russell 3000.
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The Alpha Architect US Quantitative Value ETF may not appear to be very Munger or Buffett-like on the surface. This actively valued fund excludes financials. And both Berkshire Hathaway and Daily Journal are investors in big banks. Bank of America is a top holding for Berkshire Hathaway while Daily Journal owns BofA, Wells Fargo and US Bancorp.
But Stone thinks that this ETF has a little bit of the Berkshire Hathaway approach to buying quality growth. The managers of the fund search for attractively valued companies that have stable and predictable earnings. And that typically leads them to some Buffett/Mungeresque stocks that aren't as widely followed by Wall Street, hidden gems of the market.
Stocks That Sparkle
To that end, one of QVAL's top holdings is jewelry chain Signet Jewelers. Berkshire Hathaway is the parent company of Omaha-based jeweler Borsheims. QVAL also owns a big stake in sporting goods retailer Academy Sports and Outdoors. That complements Berkshire Hathaway's Brooks running shoe unit. The fund also owns several homebuilder stocks, including Meritage Homes, KB Home and Toll Brothers. Berkshire is a big builder in its own right, thanks to its Clayton Homes subsidiary.
Stone said that the QVAL ETF has "some shades of what Berkshire would do if they could buy smaller stocks" instead of focusing almost exclusively on blue chip companies. What's more, Stone thinks the fund's success proves that, like Munger and Buffett, you don't have to always side with the conventional Wall Street wisdom to make money. The ETF was up nearly 30% in 2023. "The fund had a very good year despite having no exposure to the Magnificent Seven," Stone said.
