No possibility of repeating Berkshire’s ‘eye-popping’ performance, says Warren Buffett

We want to own either all or a portion of businesses that enjoy good economics, Warren Buffett said

Berkshire Hathaway’s goal is to own either all or a portion of businesses that enjoy good economics that is fundamental and enduring, but the conglomerate’s sheer size, as well as increased competition, means the era of its ‘eye-popping’ performance is over, its chairman Warren Buffett said.

In his widely-read annual letter to Berkshire shareholders on February 24, Buffett paid tribute to his long-time friend, associate and vice chairman of Berkshire, Charlie Munger, who passed away in November last year.

“Charlie was the “architect” of the present Berkshire, and I acted as the “general contractor” to carry out the day-by-day construction of his vision,” Buffett wrote.

Also Read: Warren Buffett calls Charlie Munger architect of Berkshire in his tribute

Speaking about the operating philosophy of Berkshire, Buffett said the company’s goal is simple.

“We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict who will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen,” he said.

At Berkshire, we particularly favour the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure, the billionaire ‘Oracle of Omaha’ said.

“We also hope these favoured businesses are run by able and trustworthy managers, though that is a more difficult judgment to make, however, and Berkshire has had its share of disappointments,” he pointed out.

This combination of the two necessities for acquiring businesses has for long been Berkshire’s goal in purchases and, for a while, it had an abundance of candidates to evaluate.

“Those days are long behind us; size did us in, though increased competition for purchases was also a factor,” Buffett wrote.

He added that Berkshire now has – by far – the largest GAAP net worth recorded by any American business. Record operating income and a strong stock market led to a yearend figure of $561 billion.

The total GAAP net worth for the other 499 S&P companies – a who’s who of American business – was $8.9 trillion in 2022. (The 2023 number for the S&P has not yet been tallied but is unlikely to materially exceed $9.5 trillion.)

By this measure, Berkshire now occupies nearly 6% of the universe in which it operates, he added.

“Doubling our huge base is simply not possible within, say, five years, particularly because we are highly averse to issuing shares (an act that immediately juices net worth),” he said.

“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,” he highlighted.

However, Buffett added that on the positive side, after 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies.

“By both luck and pluck a few huge winners have emerged from a great many dozens of decisions. And we now have a small cadre of long-time managers who never muse about going elsewhere and who regard 65 as just another birthday,” he said.