Berkshire's Still Got It

Talk to Berkshire Hathaway (BRK.B -0.01%) shareholders, and most will tell you that two things scare them about their beloved company: Warren Buffett's mortality, and the possibility of the company becoming so large that Buffett won't be able to put enough money to work at favorable terms to move the needle.

The first one is a legitimate concern and won't go away. But it's becoming more evident that the second problem isn't much of a problem at all. Berkshire has invested tens of billions of dollars over the last four years at terms others can't dream about.

"The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas," Buffett lamented in 1995. "We need 'elephants' to make significant gains now -- and they are hard to find," he said in 2001.

Not too hard, though, as you can see from a list of Berkshire's biggest deals since 2008:

That's $83.6 billion since 2008 alone -- and it doesn't include adding billions to its existing stake in Wells Fargo, among other investments. That's more than the $49.7 billion Berkshire earned in net income during the period. If it's getting harder to find investment ideas, you wouldn't know it.

Most of these deals were done at terms few, if any, other investors can receive. Buffett's most recent deal with Heinz included an $8 billion preferred stock investment yielding 9%, or about 50% more than the current yield on junk bonds. The 2011 deal with Bank of America may go down as one of the most lucrative in Berkshire's history: A $5 billion preferred-stock investment came with warrants to buy 700 million B of A shares at $7.14 per share, or more than a third below the current share price. Not only is Buffett putting tens of billions of dollars to work, but he's minting money for Berkshire shareholders.

Part of the reason companies are willing to cut special deals at great terms is because they want more than Berkshire's cash. They want its name and its reputation. This, I think, might be something Buffett himself underestimated, and explains why he's been warning about the difficulty of putting big sums of money to work for years despite striking monster deal after monster deal. Berkshire is one of the only investors in the world whose presence is cherished. Companies losing faith from the markets -- mostly banks -- know this, and will pay up for it. That's a big competitive advantage for Berkshire. "Delaware Pension Fund Buys Stake in Banks" just doesn't make people feel better. "Buffett Buys Stake in Banks" can nearly end a financial crisis. Even companies not looking for a boost gush over Berkshire. "We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family," said Matt Rose, Burlington Northern's CEO, the day the company was acquired. No one talks about private equity firms like that. 

The key to Berkshire's future is less about Buffett (and his successors) finding great investment ideas as it is maintaining the ability to rent its reputation, so those ideas come begging to Berkshire's door. "It takes 20 years to build a reputation, and five minutes to ruin it," Buffett likes to say. Let's hope that remains Berkshire's motto.