Berkshire Hathaway investors should diversify into tech after decades of the sector outperforming Warren Buffett's conglomerate, DataTrek says

• Berkshire Hathaway investors should diversify their portfolio into large cap tech stocks, according to DataTrek Research.
• DataTrek highlighted that Warren Buffett's conglomerate has underperformed tech stocks for decades.
• "The advance of technology through constant disruptive innovation is an evergreen investment theme that can often best two of the most talented money managers on the planet."

Berkshire Hathaway investors have plenty to be thankful for given the stocks' solid outperformance relative to the S&P 500 over the past few decades, but the same can't be said when compared against technology stocks.

Over the past two decades, tech stocks have significantly outperformed Warren Buffett's conglomerate, and that's one reason why Berkshire investors should diversify their portfolio exposure into large cap tech, according to a Monday note from DataTrek Research.

Another reason is because Buffett and Berkshire Hathaway vice chairman Charlie Munger have largely avoided investing in tech companies throughout their career, aside from a bet on Apple that has done exceptionally well.

But that Apple investment has not made up for all of the underperformance Berkshire Hathaway has experienced relative to tech stocks over the years.

Compared against the SPDR S&P 500 Technology ETF, Berkshire Hathaway stock has underperformed tech stocks over the past five-, ten-, fifteen-, and twenty- years by 58, 188, 239, and 275 percentage points, respectively, according to DataTrek.

"As for why an index fund like XLK should be able to reliably beat Warren Buffett over long-term holding periods, we think it is simply because this is not a fair comparison," DataTrek co-founder Nicholas Colas said.

"The tech sector has tens of thousands of talented engineers and business people, all looking to create and leverage the next big idea(s). Buffett is an amazing investor – maybe the best ever. But there is an understandable difference in long run returns between those who create the future and those who invest primarily in older-line industries," Colas said.

But the longer run outperformance of technology stocks relative to Berkshire Hathaway "tells a clear story," Colas said, and Berkshire Hathaway investors should take note.

"We're not saying every Berkshire shareholder should swap into XLK, but they might want to consider adding US large cap Tech to a portfolio that already includes BRK," Colas said. "History says pairing the two assets in a diversified portfolio makes sense."

The recommended diversification should work because Berkshire Hathaway has long shied away from technology investments across both its underlying businesses and stock portfolio, and Berkshire tends to outperform during a risk-off environment and when interest rates are rising.

That's exactly what investors want out of a diversified portfolio. The diversification should also work because according to Colas, the trend of tech stocks outperforming Berkshire Hathaway is likely to continue.

"The advance of technology through constant disruptive innovation is an evergreen investment theme that can often best two of the most talented money managers on the planet," Colas said.