"This Time" Is Never Different for Buffett and Berkshire Hathaway

Friday's Wall Street Journal featured an article detailing Warren Buffett's increasingly difficult task of allocating Berkshire Hathaway's massive cash pile toward multibillion-dollar acquisitions. While many of the conglomerate's recent purchases have been small nominally, the results have been outsized and continue to add to Berkshire Hathaway's already gigantic equity base.

Despite recent success, some investors are worried that the company is too big to significantly grow shareholder value. Those investors have included Buffett himself.

"The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas," Buffett described in all the way back in 1995. The stock still managed to outpaced the market by more than 240% since the beginning of 1995.

And again in 2001: "We need 'elephants' to make significant gains now -- and they are hard to find." Again, the stock has outpaced the market by more than 110% since the beginning of 2001.

The topic was even tossed around Fooldom back in 2004 during an interview between Fool CEO Tom Gardner and author Michael Lewis:

Michael Lewis: I think that, at this point in Warren Buffett's career, if there are opportunities to be had from his approach, it would be had from finding his mistakes.

Tom Gardner: Well, I believe he's hampered by the amount of money that he has to invest. He's forced to be in much larger companies than the rest of us. So when he says the market looks overvalued, and that investors will get low returns, and that he can find no opportunities now ... we have to factor in that he is having to allocate a fortune ... tens or hundreds of millions of dollars ... where most of the rest of us have thousands or tens of thousands of dollars to allocate. The market for investments in very large entities may be overvalued for Mr. Buffett ... while the market for very small entities may still have loads of opportunity in it.

Lewis: That is right, so he can't invest in the things where there is hidden value, because they are too small for him.

Time and time again, investors lament that "this time is different." Others point to the fact that since Buffett isn't making major acquisitions, it must mean the market is wildly overvalued. In the interview, Tom Gardner dispels that notion and could not have been more correct. Since that interview with Michael Lewis, even the shares of the "hamstrung" Berkshire Hathaway are up nearly 110%, while the S&P 500 has logged returns of more than 50%, even after experiencing the worst recession in 70 years.

Today, are some stocks wildly overvalued? Yes. Absolutely. Are some stocks dirt cheap? You bet. But that is not a market scenario unique to 2013. No matter the time in history, there have always been overvalued stocks, as well as undervalued stocks. Company names change, and tickers come and go, but the markets stay the same. By admitting that this time is not different, investors committed to tuning out the rhetoric and "getting rich slowly" will continue to give themselves the best chance for long-term success.

Those "very small entities" that offer loads of potential are still a plenty. In The Motley Fool's free report "The Stocks Only the Smartest Investors Are Buying," you can learn about a small, under-the-radar bank that's too tiny for Buffett's billions. Too bad for him, because it has better operating metrics than his favorites. Just click here to keep reading.

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  • Report this Comment On August 10, 2013, at 11:46 AM, Danielj1960 wrote:

    I have so much respect for Mr Buffet. I don't know if I could give away 2 billion dollars with a smile like he does. God bless him.

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