- In this year’s virtual shareholder meeting, Berkshire Hathaway’s (NYSE:BRK.B) chairman, Warren Buffett, emphasized why the S&P 500 index is important for investors that might not otherwise be able to pick individual stocks.
- He called the index a “cross-section of America.” Tesla (NASDAQ:TSLA) might join the S&P 500 index if it posts a net profit in the second quarter.
Although Warren Buffett has trailed the S&P 500 (NYSEARCA:SPY) by a significant margin since the beginning of 2019, many people value his investment advice. This year’s shareholder meeting was virtual due to the pandemic. Buffett talked about index funds, especially for investors who can’t pick individual stocks.
During the meeting, Buffett said, “Get a cross-section. And in my view, for most people, the best thing to do is to own the S&P 500 index fund.” In the fourth quarter of 2019, Berkshire Hathaway brought some S&P 500 ETFs. Last year, Buffett said that he expects Berkshire Hathaway to only modestly outperform the S&P 500.
Tesla might enter the S&P 500
Tesla would be eligible for inclusion into the S&P 500 if it posts a net profit in the second quarter. So far, Tesla has a dismal profitability record in the past decade. The company has posted a net profit for three consecutive quarters. If a stock enters the S&P 500 index, funds would have to buy the stock in proportion to its weight in the index.
Warren Buffett and TSLA
Tesla CEO Elon Musk and Warren Buffett aren’t close friends. In May, Musk said that he isn’t a fan of Warren Buffett. Last year, when TSLA launched its auto insurance, Buffett had a word of caution. He said that auto insurance isn’t an easy business. Many automotive companies failed at the venture. Last year, in an interview with CNBC, Buffett said that Musk has “room for improvement” as Tesla’s CEO.
Berkshire Hathaway might never otherwise own Tesla
Many investors look to Warren Buffett due to his value investment principles. The value investing strategy has underperformed growth over the last decade. As a standalone stock, Berkshire Hathaway might never own a stake in Tesla. The company’s valuations are at a level where a value investor like Buffett wouldn’t think of buying it. While growth stocks like TSLA can’t be valued the purist way, investors have to draw a line somewhere. Now, Tesla’s market capitalization is more than Toyota, which sells more than 20x the vehicles.
Warren Buffett might have to own TSLA
Meanwhile, if Tesla gets included in the S&P 500 index, Warren Buffett and others holding S&P 500 index funds or ETFs would indirectly hold the stock. With an index fund, there isn’t an investing bias. The fund has to buy and hold stocks according to their weight in the index.
Many investors who might not invest in TSLA due to its high valuation, would have indirect exposure to the stock if it gets included in the S&P 500.
Warren Buffett might not approve of some of TSLA’s accounting policies. Read What Warren Buffett Might Say about Tesla’s Q3 Earnings to learn more.