Is Berkshire Hathaway Too Big For Their Own Good?
Buffett has continuously warned investors to par back expectations of Berkshire Hathaway.
At the time of writing this and (ideally) forever, I own shares of Berkshire Hathaway BRK.B. This is not investment advice, and is purely for entertainment purposes only.
Our favorite holding period is forever. - Warren Buffett
The Annual Report
Last Saturday Warren Buffett’s always anticipated annual letter was at the center of attention for many investors, and it definitely did not disappoint. If you haven’t already, I highly recommend reading it: (available here: https://www.berkshirehathaway.com/2023ar/2023ar.pdf). The first page of this report is a simple yet touching tribute to Warren’s best friend and investing partner Charlie Munger, who he describes as the “architect” of Berkshire. If you read nothing else, I recommend the first page.
It’s likely that everything that can be said about this report has already been said, but that doesn’t stop me from having two points I want to discuss and one prediction about Berkshire’s future. Let’s dive in.
Not Enough Options
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
To those outside of the Berkshire-verse, Buffett’s record breaking cash pile of $168 billion is seen as Buffett being bearish, not believing enough in the stock market to put this capital to work. To anyone who understands Berkshire, that idea is comical, and this quote displays that.
Berkshire is a massive company. If they want an investment they make to actually be meaningful to their bottom line and not just a rounding error, the investment has to be meaningful in size. This means a $1 billion investment in a $10 billion company doesn’t get it done for them, but maybe $20 billion into a $200 billion company could move the needle.
If we assume that any company with a market cap of $50 billion or more is capable of “moving the needle” at Berkshire, then they are limited to 180 companies to make an investment in. Of these companies, how many will meet Berkshire’s standards, and be attractively priced right now? Probably close to zero.
What has historically made Berkshire great is their patience in waiting for a “fat pitch” investment. They won’t make an investment because they feel they “have to”. Also to be considered is the current yield on short-term treasuries. It is no secret much of Berkshire’s cash is kept in U.S. treasuries under 1 year to maturity. With the highest rates we’ve seen in years, Berkshire is earning massive amounts of interest on this cash. This adds an extra element to any investment equation: Does the potential investment have a higher risk-adjusted return than a risk-free treasury yielding 5%? That is a high hurdle to jump.
Too Big To Grow?
Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond “slightly better,” though, is wishful thinking. This modest aspiration wasn’t the case when Bertie went all-in on Berkshire – but it is now.
For years now Warren Buffett and Charlie Munger have warned that Berkshire Hathaway shareholders should no longer expect the spectacular returns they have had in the past. This goes back to the previous conversation of the sheer size of Berkshire makes it hard to increase substantially in value in a short amount of time. This is true for any large company you can think of (minus Nvidia apparently). Warren goes on to say in the above quote that when Bertie (his sister) invested in Berkshire it was a much smaller company, which meant it could do more and grow more than it can today.
There’s nothing wrong with this in my eyes. If the S&P 500 does 8% over the next 20 years and Berkshire does 10% I would be beyond thrilled. Investing is largely managing expectations, and if you expect massive returns you will be sorely dissapointed.
Will Berkshire Ever Go Ex-Dividend?
Warren Buffett and Berkshire Hathaway have not paid a dividend since the 1960’s, and even then Warren jokes the board approved the dividend while he was using the restroom. Buffett has said numerous times that Berkshire prefers to retain the earnings and reinvest them back into their businesses. Berkshire believes they can provide a higher return by reinvesting the capital themselves instead of individual investors allocating that capital themselves. I would bet there is about a 50% chance of this changing in the next, say, 10 years.
One argument in favor of this would be the facts we mentioned before, being Buffett’s belief it will be harder to grow Berkshire due to its size and his expectations of only slightly better returns than the S&P 500. There may get to be a point where the calculus would tell Berkshire it would be more beneficial to return cold hard cash to shareholders rather than use it themselves. Of course I am sure if they instituted a dividend policy it would be wildly conservative, likely a small percentage of operating earnings, but for some investors it would be a welcomed treat.
One argument against this would be the fact Berkshire has always loved having a stacked cash pile, and this could slow the growth of that cash pile. Management would also have to weigh a share buyback versus dividend growth plans, and for most of Berkshire’s history buying back shares has been the way to return capital to shareholders. If they were to have to balance these two, they could end up with less dry powder than they’d want when opportunities arise. I don’t see that scenario being the most likely outcome of a dividend at Berkshire, but less flexibility could definitely be a reason they decide to never pay a dividend.
More Berkshire!
I can confidently say I never plan to sell my shares of Berkshire Hathaway (BRK.B, not enough of a baller for BRK.A), simply out of principal. Obviously this has been a great investment for me (and my ticket to the annual meeting!), but being able to own the collection of wonderful businesses built by Warren Buffett and Charlie Munger is invaluable to me.
I’ve learned a lot about investing from Warren and Charlie, and every chance I get I try to learn more. In the past I refrained from writing about Warren and Berkshire too much solely because so many people do, and I didn’t want to just be another person who wrote about Berkshire. I’ve decided that is going to change, and maybe monthly, or quarterly, or whenever I want, I am going to talk about Berkshire Hathaway, Warren Buffet, and Charlie Munger. Maybe I’ll revisit an old annual letter from Buffett, reflect on a chapter of Poor Charlie’s Almanack, or dig into one of Berkshire’s great businesses. In any case, I am going to dedicate more of my time and head space to Berkshire Hathaway, and I hope I can share the stories of Berkshire in an entertaining way.