Monish Prabrai is a well-respected value investor who’s managed to build a fortune by effectively incorporating the teachings of the great Warren Buffett. Undoubtedly, he’s a man who’s well worth listening to, especially for self-guided investors seeking a bit more direction in a challenging market environment. While the S&P 500, an index commonly bought without question by passive investors and so-called Bogleheads, is a great one-stop shop for many, I do think that investors are only smart to ask questions about its somewhat lofty valuation.
The S&P 500 is certainly looking a tad pricey these days
At just north of 6,000, the S&P 500 is starting to look a tad on the pricey side, currently trading at around 28.6 times trailing price-to-earnings (P/E). Of course, a P/E ratio on the high end does not necessarily mean that the stock market is overdue for a dip into bear market territory (a fall of at least 20% from the peak). But it could signify relatively muted forward-looking returns for investors relative to the risks taken on. Indeed, with Trump’s tariffs still very much online and tensions growing between Iran and the U.S., there’s certainly no shortage of risk out there. Yet, the path of least resistance still seems to be higher, at least for the time being.
At the end of the day, it’s corporate earnings that matter most, and until big-name firms start falling short of estimates and downgrading full-year guidance becomes the major theme, it could prove wise to stay the course in spite of the geopolitical and global trade uncertainty, recession risks, and concerns for where consumer spending goes from here. With the rise of artificial intelligence (AI) and its potential to beef up earnings and margins, perhaps some part of the S&P 500’s premier multiple is justified. But for investors seeking a better “deal,” I do think Mr. Prabrai’s words make a lot of sense.
Berkshire Hathaway could be a better bet than the S&P 500
Earlier this year, Mr. Prabrai expressed his belief that Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B | BRK-B Price Prediction) could be a “better index” than the S&P 500. While Buffett has praised the S&P 500 as the index to own, I do think that Prabrai is right on the money when he holds Berkshire in higher standing than the S&P 500, especially at today’s slate of valuations. Indeed, Berkshire has a magnificent management team, a relatively modest multiple, impressive cash flow-generative assets, and, perhaps most importantly, a mountain of cash that its legendary investors (including the great Warren Buffett) can put to work on bargains when the next big market blowup happens.
Add the S&P 500’s heavier tech weighting and vulnerability to an AI-driven correction into the equation, and it’s clear that Berkshire stock may be the more shrewd bet on a number of fronts. Today, shares of BRK.B boast a 0.84 beta, meaning a slightly lower correlation to the S&P 500. After holding its own far better than the S&P 500 during the first half, tariff-fueled correction, I think the case for owning Berkshire over the S&P 500 is as strong as it’s ever been.
I think Prabrai is right on the money to favor Berkshire over the S&P 500, even as Buffett steps down from his role as CEO at year’s end. Greg Abel is a worthy successor of the Oracle of Omaha, and he has all the tools to take the conglomerate to the next level. As Berkshire maintains its risk-averse mentality, I think investors should take advantage of the recent correction in shares, as the so-called Buffett premium continues to melt away.
The bottom line
With the S&P 500 within a percentage point of new highs and Berkshire down close to 10% from the top, I think Berkshire may very well be the better (and cheaper) bet than the iconic index of 500 stocks. Of course, the 1.6 times price-to-book (P/B) multiple on Berkshire shares doesn’t entail a massive discount, but I do view it as a very fair price to pay for a firm that’s destined for continued success under its successors.
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