Warren Buffett and Charlie Munger Disagree on This Piece of Investment Advice

By Matthew Frankel Markets Fool.com

Berkshire Hathaway(NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett doesn't think his wife should invest in Berkshire stock after he's gone, which may come as a surprise given Berkshire's track record and Buffett's own optimism for the company after he's gone. Charlie Munger, Buffett's right-hand man, disagrees. He thinks Berkshire will put his heirs in the best position to grow their inheritance going forward.

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Why do they disagree, and who is right?

Warren Buffett wants his wife to keep it simple

Warren Buffett has said several times that the best investment most people can make is in a low-cost S&P 500 index fund, and he even bet $500,000 that such a fund would beat a portfolio of hedge funds over a decade, a bet he handily won.

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However, at Berkshire's recent annual meeting, Buffett was asked why he advised his own wife to invest in index funds after his death, as opposed to Berkshire shares. It's a good question -- after all, Buffett has said many times that he feels Berkshire will continue to outperform the market over long time periods. So why wouldn't he want his wife to benefit from that?

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Buffett responded that his wife won't need to beat the market. "She's going to have more money than she needs," Buffett replied. He went on to say that index funds are the best investment for people who don't want to worry about their investments. He also noted that every single one of his own Berkshire shares is going to be given to charity, so that's why his wife won't inherit any of his stock.

Basically, Buffett feels that most people, his wife included, do not have the time, desire, and/or knowledge required to efficiently choose their own stocks. And he believes that actively managed investment funds, particularly hedge funds, are more likely to underperform the market than beat it. By advising his wife to invest in index funds and leave them alone, he feels he's protecting her from those who don't necessarily have her best interests at heart.

Charlie Munger thinks Berkshire still has plenty of good years ahead

Buffett's right-hand man disagrees. Munger wants his heirs to hold on to their Berkshire shares, as he wants them to profit from what he perceives as the higher upside potential they would get from Berkshire.

It's easy to understand why he feels this way. Berkshire has more than 60 businesses that generate tons of cash, and Berkshire's team (not just Buffett and Munger) has proved its ability to identify value-adding acquisitions and stock investments that Berkshire can purchase for less than their intrinsic value. Combined with the fact that Berkshire maintains a rock-solid balance sheet and doesn't expose itself to virtually any long-term risk factors, and it's tough to imagine that Berkshire won't enjoy decades of strong performance ahead.

Who's right?

Buffett and Munger both make some excellent points, and neither man's advice to his heirs is in direct contradiction to the other's. For example, by owning Berkshire shares, Munger's heirs won't have to worry about the investment fees Buffett is trying to protect his wife from. And an S&P 500 index fund has some of the same defensive attributes of Berkshire, such as diversification.

The bottom line is that there's good advice in both Buffett and Munger's wishes for their heirs. The basic difference comes down to what's more important to each -- years of worry-free investing, or the potential to make more money.

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Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.