Warren Buffett, the legendary investor and chairman of Berkshire Hathaway, has issued a warning to shareholders about the limited future growth potential of the conglomerate. In his annual letter to shareholders, Buffett acknowledged that there are very few deals available that could have the transformative impact of past takeovers, such as the acquisitions of Geico and National Indemnity. He also stated that there are essentially no meaningful options for capital deployment outside of the US.
This is a problem that Buffett has been grappling with for almost a decade as Berkshire’s operations and cash levels continue to grow. Despite making significant acquisitions in recent years, such as truck-stop operator Pilot Flying J and insurance conglomerate Alleghany, these purchases have only made a small dent in Berkshire’s cash pile, which reached a record $167.6 billion at the end of 2023.
Buffett attributes this lack of growth opportunities to the size of Berkshire and increased competition for purchases. He laments the fact that there used to be an abundance of candidates to evaluate, but those days are long gone. However, he remains optimistic that Berkshire can still outperform the average US company and operate with less risk of permanent loss of capital.
The passing of Charlie Munger, Buffett’s longtime investment partner and vice-chair of Berkshire, has raised concerns about the company’s prospects without Buffett at the helm. Greg Abel, Buffett’s chosen successor, along with investment deputies Todd Combs and Ted Weschler, are set to take over the reins of the conglomerate. They have big shoes to fill, as Berkshire shares have returned a staggering 4.4 million percent since 1964, far surpassing the gains of the benchmark S&P 500.
Buffett’s letters to shareholders, along with his comments and interviews over the years, serve as a guidebook for future leaders of Berkshire. He emphasizes the importance of fiscal conservatism and avoiding permanent loss of capital. Buffett also highlights the company’s ability to seize opportunities during market panics, as demonstrated by its $50 billion investment in stocks during the market sell-off in early 2022.
However, Berkshire now faces tougher competition than in the past, with private equity firms wielding more firepower. Buffett has expressed concerns about stretched valuations and high multiples in the market, which have made it difficult for Berkshire to find appealing investments. As a result, the company has become a significant investor in its own shares and regularly engages in buybacks.
Despite its strong performance, Berkshire has faced challenges and missteps. The company is currently embroiled in high-profile litigation that could cost it over $10 billion. Its utility subsidiary, PacifiCorp, has paid settlements for wildfires and faces potential losses of billions of dollars. Berkshire’s realtor division, HomeServices of America, is also facing antitrust lawsuits that could result in substantial damages.
In conclusion, Warren Buffett’s warning to Berkshire Hathaway shareholders underscores the challenges the conglomerate faces in finding growth opportunities. While Buffett remains optimistic about the company’s ability to outperform and avoid permanent loss of capital, he acknowledges the limited potential for eye-popping performance in the future. As Buffett’s successors prepare to take the helm, they will need to navigate a more competitive landscape and make strategic decisions to ensure Berkshire’s continued success.