Warren Buffett, the esteemed investor and CEO of Berkshire Hathaway, has issued a frank warning to shareholders regarding the future performance of the conglomerate. In his annual letter, Buffett acknowledges the challenges that lie ahead for his successors, stating that there is a limited number of companies capable of making a significant impact on Berkshire’s growth. He adds that the US market has been thoroughly explored, leaving very few options for capital deployment outside of the country.
This problem has been looming for nearly a decade as Berkshire’s operations and cash levels have continued to rise. Despite substantial acquisitions in recent years, such as truck-stop operator Pilot Flying J and insurance conglomerate Alleghany, the company’s cash pile remains formidable, reaching a record $167.6 billion at the end of 2023.
Buffett attributes this situation to the company’s large size, which has made it increasingly difficult to identify attractive investment opportunities. While Berkshire used to have an abundance of candidates to evaluate, competition for purchases has intensified in recent years. Buffett admits that he has missed out on multiple opportunities due to heightened competition.
Buffett’s successor, Greg Abel, along with investment deputies Todd Combs and Ted Weschler, will face a challenging task as they steer the company towards continued success. Berkshire’s shares have delivered remarkable returns over the years, outperforming the benchmark S&P 500 by a staggering margin. However, Buffett suggests that future performance may not be as remarkable, predicting only slightly better-than-average returns and a reduced risk of permanent capital loss.
Berkshire’s investment philosophy will remain grounded in fiscal conservatism, a principle that has underpinned the conglomerate for decades. Buffett emphasizes the importance of avoiding permanent loss of capital, which he considers a fundamental investment rule.
Despite the challenges of finding worthwhile investments in public markets, Buffett believes that opportunities for sizable investments may arise during periodic market panics. Berkshire has proven its ability to quickly respond to market downturns and capitalize on favorable conditions, as it did in early 2022 when it invested over $50 billion into stocks during a market sell-off.
However, it is important to recognize that Berkshire now faces much fiercer competition compared to previous decades. Private equity firms, armed with substantial capital, regularly outbid each other to secure lucrative deals. As a result, Berkshire has increasingly turned to buying back its own shares instead of investing in public markets.
Buffett also takes the opportunity to pay tribute to his longtime partner Charlie Munger, who passed away last year. He credits Munger as the architect of modern-day Berkshire Hathaway, emphasizing his instrumental role in shaping Buffett’s investment approach. Munger encouraged Buffett to move away from a “cigar-butt” investment strategy, which involved buying low-priced stocks near the end of their value. Instead, Buffett transitioned to investing in fairly-priced, well-managed businesses, a shift that has paid off handsomely.
Overall, the challenges facing Berkshire Hathaway in terms of identifying sizeable investment opportunities and competition in the market are significant. As Buffett prepares to pass on the reins to his successors, the company’s ability to maintain its exceptional track record may be tested. Nevertheless, with its strong financial position and proven ability to seize market opportunities, Berkshire Hathaway remains a powerhouse in the investment world.
