FINANCE Bloomberg Businessweek June 29, 2020
23From 1965 through the end of last year, the
annualized return on Berkshire stock was 20.3%,
compared with 10% for the S&P 500 index. It now
has a total market value of $441 billion and is the
only company among the six largest in the S&P 500
that wouldn’t be classified as a technology giant.
Berkshire’s size is Buffett’s achievement but also a
bit of a problem. While Buffett can drop large sums
of money on a deal, he also needs bigger buyouts
or larger stock purchases to move the needle for
Berkshire. His failure to find those “elephant-sized”
deals, as he’s called them, recently has contributed
to Berkshire’s underperformance vs. the S&P 500
in the last five years.
Even during the tumultuous market in March
that started chipping away at stock valuations,
Buffett was relatively quiet. That’s fueled ques-
tions about what shareholders actually get when
they invest in Berkshire. If they aren’t reaping
the benefit of Buffett’s ability to strike unique and
complicated deals similar to ones he’s pulled off
in the past—such as the BNSF buyout and the pre-
ferred stock investments with companies includ-
ing Goldman Sachs Group Inc.—are they simply
getting an oversize conglomerate chock-full of old-
fashioned industrial businesses and retailers?
It’s shifting to “being a conglomerate, and that’s
OK, but it does have a different value proposition
for people,” says Meyer Shields, an analyst at Keefe
Bruyette & Woods. “It’s a conglomerate that cer-
tainly in the past was able to achieve unrivaled
returns, and it’s much harder to see that materi-
alizing again. So you’ve got a bunch of very good
businesses—probably some below-average, too—but
you’ve got a bunch of very good businesses.”
That’s not so exciting, but it has its advantages.
Buffett held a record $137 billion in cash at the end
of the first quarter and has said he’ll keep Berkshire
as a “financial fortress.” When the S&P 500 plum-
meted more than 38% in 2008, Berkshire was down
just 32%. “What Warren offers investors and has
offered them is the assurance that once the mon-
ey’s inside Berkshire, they’re going to do what’s
right with it,” says Tom Russo, who oversees a port-
folio including Berkshire at investment adviser
Gardner Russo & Gardner.
Buffett’s critics wonder if his strategy has run
its course. Longtime shareholder David Rolfe
at Wedgewood Partners Inc. ended up getting
out of the stock last year, saying that Buffett’s
successful deployment of his cash would be
“ paramount” if Berkshire wants to regain its
ability to deliver outsize growth. “We know the
conglomerate isn’t growing anywhere near what
it has in the past,” he says. But investing such a
large sum of money is a feat that few have tried.
And the conditions for investing are challenging.
Low interest rates and bond yields have pushed
investors into stocks in search of better returns, so
equity valuations are high. Buffett has had to com-
pete with an army of private equity funds in the
hunt for attractive investments. It’s a tough envi-
ronment for a bargain hunter—one that’s “liter-
ally shut down the capital allocation machine at
Berkshire,” Rolfe says.
Berkshire didn’t respond to requests for com-
ment, but Buffett is acutely aware of the drag of
size on its performance. He acknowledged it at the
2019 annual meeting and warned of it long before.
“Warren has said for decades that, as we grow, our
rate of return will go down,” says James Armstrong,
president of Henry H. Armstrong Associates, an
asset manager that invests in Berkshire.
Berkshire’s makeup has also shifted in recent
decades. Buffett said in his 2018 annual letter that
it had morphed from a business “whose assets are
concentrated in marketable stocks into one whose
major value resides in operating businesses.”
Over the decades, Buffett took the textileBerkshireHathaway’sWhollyOwnedBusinesses
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