Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) recently put some of its cash to work in two foreign financial technology, or fintech, companies. One of them, StoneCo (NASDAQ:STNE), was an IPO investment for Berkshire -- that is, the Warren Buffett-led conglomerate bought shares as part of StoneCo's initial public offering.
Since going public, StoneCo's stock price has risen by more than 11%, which translates to a pretty nice gain for Berkshire in just a couple of weeks. However, this investment is a prime example of why it's so hard for Berkshire Hathaway to continue to generate the type of returns investors have enjoyed throughout Berkshire's 54-year history since Warren Buffett took over.
One of Berkshire's recent fintech investments is a big win (so far)
Here are the new details we've learned about Berkshire's StoneCo investment. Berkshire paid $340 million for 14,166,748 shares of StoneCo in its IPO, which took place on Oct. 25.
Shares were priced at $24 during the IPO, and trade for $27.40 as of this writing (1 p.m. EST on Nov. 9). In all, Berkshire's stake has already gained about $48.2 million in just over two weeks. This translates to a 14.2% gain on the $340 million investment.
It's hard to move the needle these days
While this is obviously a nice return, the problem is that investments of this nature don't really move the needle too much for Berkshire Hathaway shareholders.
Here's a quick mathematical explanation of why investors shouldn't get too excited about the StoneCo profits, or any of Berkshire's investments of similar size.
Between the two classes of Berkshire stock, the company currently has a market cap of $540 billion. One Class B share of Berkshire (the kind most investors can afford to own) trades for about $220 as of this writing. And, there are the equivalent -- including Class A shares -- of 2.5 billion Class B shares of Berkshire outstanding.
This means that the handsome gain on the StoneCo investment translates to a gain of less than $0.02 per share for Berkshire investors -- or less than one-hundredth of 1%.
Now, a 14% gain on an investment in just two weeks is quite a nice return. Most people reading this would be thrilled if they bought a stock and it went up so quickly. But because of the sheer size of Berkshire Hathaway, it barely matters to investors on a per-share basis. Because the company has gotten so large, deals need to be in the billions, or more likely in the tens of billions, to have a meaningful impact on Berkshire's bottom line. And attractive investment opportunities in this realm are few and far between.
But market-beating performance is still possible
In his 50th anniversary letter to shareholders a few years ago, Warren Buffett cautioned investors that Berkshire's returns over the next 50 years wouldn't come close to those of the first 50. And Berkshire's size is the reason.
From 1965 through the end of 2017, Berkshire's stock rose at an annualized rate of 20.9%. If this level of performance was sustained for another 20 years, Berkshire's market cap would be more than $24 trillion. After 30 years, it would be more than $160 trillion. After 50 years... well, you get the idea -- at some point it becomes mathematically impossible to keep 20%-plus returns going.
Having said all that, Berkshire's business model should allow it to continue to beat the market, just not by as wide of a margin. In fact, the stock is handily beating the S&P 500 so far in 2018, thanks to a combination of strong performance from its subsidiary businesses and good returns from its stock portfolio.
Still a great investment, but manage your expectations
Here's the point. If you want to replicate Warren Buffett's investing performance from the past half-century, investing in Berkshire Hathaway now is not the way to do it. The mathematics simply don't work at this point in the company's maturity.
However, Berkshire is an appropriate investment for people who understand that the company is a diversified collection of businesses and stock investments hand-selected by the best managers in the business. Berkshire isn't going to turn a $1,000 investment into more than $23 million like it did in its first 53 years with Buffett at the helm, but it should still be a great way to build wealth over time.