Tuesday, November 11, 2008

Berkshire Hathaway profits down 77%?

Some folks are wondering what I think about Warren Buffett's company, Berkshire Hathaway, seeing a 77% drop in earnings in the third quarter. The answer is simple; the company is just too big. It is a $175 billion company. It cannot change itself quickly and it does not desire to. This is why I do not think (and have not thought since my late teens) that Berkshire makes a great investment. I have never owned the stock of my hero, save for one instance where I could not secure credentials for the annual meeting any other way.

If Warren were running a $20 million fund, I would put 100% of my net worth in it and never look back. But today he has to try to place $40 billion ($50 billion minus $10 billion he wants to keep as float for potential disasters related to his super-catastrophe insurance) and there just isn't a lot out there that will give you 30% per year compounded on $50 billion.

This produces several ironies. One is that I will never own the stock of the man who has taught me everything because I consider it a poor investment. Another is that I will outperform Warren every year for the rest of his life even though he is far smarter than I could ever be and is a far greater investor than I will ever be. But I'm working with a much smaller stack of money. The more money you have, the more you can make, but only up to a point. After that point, money becomes a boat anchor slowing you down. This is where Berkshire has been for 15 years.

Warren has a personal investment account he uses to play around in outside of Berkshire. I estimate this account to be worth $400 million or so. I am quite confident that he will beat me in that personal account, although I think I will beat him for 2007, 2008, and 2009. It's a shame I'll never get to find out.

1 comment:

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