Beginning with its 1965 annual report, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has included a list of stock performance comparisons with the S&P 500 since Buffett took over the company. It’s an amazing track record.
The money of investors who joined Buffett’s team in 1965 has grown at an average yearly rate of 19.8%. Over the same time frame, the S&P 500 has returned an average of 10.2%. That equates to a cumulative return over 59 years that is 140 times higher than owning S&P 500.
Buffett believes that investors shouldn’t anticipate such kinds of record-breaking returns in the future. Although he still believes it’s a fantastic company to own, there’s a major obstacle preventing it from expanding as much as it once could.
The rule of enormous numbers presents Buffett with the greatest obstacle when it comes to generating astronomical profits for shareholders. When Buffett initially purchased shares of Berkshire Hathaway in the 1960s, the company was worth $20 million. Even the $100 billion corporation from the beginning of the century has changed. Its market cap is currently approaching $1 trillion quickly.
Furthermore, not all of Berkshire’s operations and assets are in rapidly expanding sectors that can sustain rapid expansion. The corporation makes investments in and/or owns stable cash-generating companies such as railroad transport and insurance.
Buffett made money for his shareholders for a long period by using the proceeds from those companies to purchase all or a portion of a new venture. In his most recent letter to shareholders, Buffett describes the specific work that Berkshire Hathaway undertakes: “We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring.”
However, finding a company that can significantly increase the holding company’s worth is difficult when you’re already the eighth-largest in the world by market capitalization.
“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” Buffett wrote to investors. “Some we can value; some we can’t. And, if we can, they have to be attractively priced.”
Therefore, Buffett suggests that a large portion of the market is currently expensive. In addition, there are just a few firms in the investable universe for Berkshire that have potential within Berkshire’s portfolio. As a result, he has amassed a record $167.6 billion in cash, the majority of which is held in short-term Treasury notes.
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