Berkshire Hathaway has been a successful company, to put it mildly.
Over the years Warren Buffett’s and Charlie Munger’s firm has had a bit of a golden touch, but that may also be its downfall according to its CEO.
“Size is the enemy of performance,” said Buffett at the company’s annual meting Saturday.
Buffett answered a question on the long-term future of Berkshire after his death by saying that the company will most likely stick around for awhile.
The biggest danger for the company, according to Buffett, is too much success. As Berkshire continues to build up, it runs the risk of that it may get too large and “run off the rails.”
Earlier in the day, Buffett remarked on the company’s recent propensity to acquire firms that require a lot of capital expenditures to run. Early in his career, Buffett was a staunch advocate of only investing in companies that didn’t have a lot of fixed costs, but that has since changed.
“It’s part of the problems of prosperity,” said Buffett. “We’d love to buy a company for $10 or $20 or $30 billion that is not capital intensive. And we may. But that is harder.”
Recently, Berkshire purchased capital intensive businesses such as Precision Castparts, which makes airplane parts, and BNSF, a railroad giant.
The upshot here is that as Berkshire has grown, it has so much cash that it has been forced to make bigger acquisitions. Buffett doesn’t want to just sit on cash since inflation would erode its value. In order to deploy its large pile of cash, Berkshire has to make bigger acquisitions.
Buffett also said this is one of the reasons that Berkshire is more likely to do stock buybacks. After decrying the growing number of repurchases across the corporate landscape, Buffett noted that he only likes to do purchases of Berkshire shares at 1.2x book value.
The company, however, has recently been doing more buybacks since deploying the cash is a better option, even if the stock is more expensive than Buffett likes.
So for all the talk about buying lean companies and only buying back stock selectively, the success of Berkshire has forced Buffett to break his own rules. The worry going forward, in his estimation, is that continued success may lead the company to break more rules more often, putting it in danger.