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Answering Your Toughest Questions About Berkshire
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I knew when I decided to critique Berkshire Hathaway publicly, there would be consequences.
For more than 50 years, investing in Berkshire Hathaway was a virtually risk-free way to beat the market. Long-term investors have been unbelievably enriched. And there’s no question that Warren Buffett was the greatest investor to ever live.
But, and it’s a big “but,” Berkshire’s primary edge – Buffett’s ability to invest its enormous insurance “float” in the public markets – has virtually disappeared over the past 25 years as the company has become one of the largest in the world. Berkshire is like the whale that ate the world. Berkshire now holds a third of its assets ($330 billion) in cash because making outstanding investments in the public markets at Berkshire’s scale is extremely difficult.
How difficult? Well, if Berkshire decided to allocate 100% of its cash into the stocks of the S&P 500 and it started with the smallest of these 500 businesses, it could buy every single outstanding share of 476 companies. Berkshire has evolved from a world-class property and casualty insurance company with a best-of-breed public equity portfolio into the world’s largest conglomerate.
And, like it or not, large conglomerates usually perform poorly. Look at GE at its peak in 2000, when it was the largest publicly traded business in the world.
Berkshire’s enormous size (around $1 trillion market cap) and its heavy commitments (roughly $200 billion) to capital intensive and highly regulated businesses (BNSF Railway and Berkshire Hathaway Energy) make it virtually certain that Berkshire will underperform the S&P 500 going forward. And then there’s this: Berkshire is at tremendous risk of suffering a major loss (potentially $40 billion+) in its power business.
Last September, Ajit Jain, who has run Berkshire’s insurance companies since 1986, sold half of his Berkshire shares in an unprecedented move. Historically, nobody sells Berkshire.