Berkshire Hathaway’s Growth Outlook
Final result on the front: Warren Buffett has long suggested that Berkshire Hathaway (BRK.A) (BRK.B) would eventually become too large to replicate its impressive early gains. Interestingly, that hasn’t happened yet. However, with more than $300 billion in cash and limited opportunities for significant acquisitions at reasonable prices, will his prediction finally come to fruition?
Detail: As Berkshire’s chairman, Warren Buffett often acts as his own harshest critic. To his surprise, he’s consistently outperformed the market by a considerable margin. This is highlighted in his 1994 annual letter to shareholders, where he noted, “In 1994, our net assets increased by $1.45 billion, or 13.9%. Over the past 30 years, our book value per share rose from $19 to $10,083, representing a compound annual growth of 23%.” He cautioned, “Charlie Munger, my partner and Berkshire’s vice chairman, and I rarely make predictions. But we are confident that Berkshire’s future performance won’t match its historical success.”
In the years that followed, Buffett achieved returns of 45%, 36%, 34%, and 48% from 1996 to 1998, continuing to outperform most investments well into 2026. Despite frequently claiming that such rapid growth couldn’t be sustained, a slowdown seems unlikely in the long run. He often remarks that “a deep wallet is the enemy of good investment results.”
The reasoning is quite straightforward. If you have $10 aiming for a 100% profit in a year, it’s somewhat manageable. With $1,000, it’s trickier but achievable. Now, consider having $100 billion to invest—options become quite restricted.
Currently, only 114 firms in the S&P 500 Index are worth more than $100 billion. Investing in a $10 million company would likely yield minimal returns. Even with a hypothetical 1,000% growth to $100 million, a $90 million profit only equates to a 1% return. Essentially, Berkshire needs to invest in extremely large companies, with a policy against hostile takeovers. Thus, if a company isn’t open to more than a 10% stake, Berkshire will respect that limit.
Berkshire sits on around $350 billion in cash and another $200 billion in stocks. It’s uncertain why they’re holding such cash reserves—whether it’s due to a lack of suitable targets or in anticipation of a market downturn—but they appear to be approaching a growth barrier. Yet, Buffett has predicted such challenges many times in the past 40 years, leaving room for potential surprises down the line.
How Did Buffett Achieve This?
Crucially, Buffett hasn’t claimed that Berkshire Hathaway will necessarily perform poorly. In fact, he suggests investors shouldn’t expect the extraordinary returns of the past. He believes that the era of 30% or 40% growth is likely behind them, and more realistic expectations should align with slightly surpassing the S&P 500. Nevertheless, Buffett has no plans to adopt the S&P’s investment strategy. He asserts, “Our approach of acquiring companies with solid economic fundamentals, led by honest and capable people at fair prices, should yield moderate success. We anticipate continuing to perform well.”
As Buffett prepares to pass the leadership baton to new CEO Greg Abel, concerns arise regarding whether Abel can replicate his predecessor’s remarkable performance. Yet, Buffett himself acknowledges that even maintaining current levels of success may prove challenging due to Berkshire’s massive size.
