Berkshire Hathaway’s Size May Limit Its Performance, Says Warren Buffett

Warren Buffett, the chairman and CEO of Berkshire Hathaway, revealed that the sheer size of his conglomerate might prevent it from outperforming the average American company. In his annual letter, Buffett explained that the lack of buying opportunities that could make a substantial impact has limited Berkshire’s potential for significant growth. As the owner of diverse businesses ranging from BNSF Railway to Dairy Queen and holding a 6% stake in Apple, Berkshire Hathaway has the largest net worth of any American business and accounts for 6% of the total market capitalization of the S&P 500 companies.

Limited Buying Opportunities

Buffett highlighted that only a few companies in the United States are capable of making a significant difference for Berkshire Hathaway, and these companies have already been extensively evaluated by both Buffett and others in the market. Buffett emphasized the importance of attractive pricing and valuations for Berkshire’s investment decisions. The most recent notable deal Berkshire made was the acquisition of insurer and conglomerate Alleghany for $11.6 billion in 2022. While Berkshire has also acquired a 28% stake in energy giant Occidental Petroleum, Buffett has ruled out buying the entire company. These acquisitions, although substantial, did not meet Buffett’s ambition of finding an “elephant-sized” target.

Capital Deployment Constraints

As of the fourth quarter, Berkshire held a record $167.6 billion in cash. Buffett mentioned that outside of the United States, there are limited viable options for deploying capital that align with Berkshire’s investment criteria. Due to this constraint, Buffett stated that Berkshire has no possibility of achieving exceptional performance. Nevertheless, Berkshire did establish a 9% stake in five Japanese trading companies — Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo — as long-term investments.

Slightly Better Than Average

Buffett believes that Berkshire’s diversified portfolio of high-quality businesses will deliver slightly better performance than the average American corporation. The risk of permanent loss of capital is also substantially lower for Berkshire due to its business mix. However, Buffett cautioned against wishful thinking and stressed that expecting anything more than slightly better performance would be unrealistic.

Despite these limitations, Berkshire Hathaway’s stock continues to reach new record highs, trading above $620,000 for Class A shares, with a market value surpassing $900 billion. In 2024 alone, Berkshire’s stock has increased by approximately 16%, more than double the return of the S&P 500 index in the same period. It is clear that Buffett’s expertise and the strength of Berkshire’s diversified businesses have contributed to its continued success.

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