Warren Buffett’s big bets set to haunt Berkshire Hathaway
Nir Kaissar
Warren Buffett shared his usual wisdom about patience, diligence, common sense and kindness in an interview with CNBC on the morning of Berkshire Hathaway’s annual meeting last weekend; This was the first meeting in decades not led by the prophecy. But the sign hanging above spoke the loudest voice.
It said “The Legacy Continues.” That legacy is Buffett’s track record in doubling the return of the S&P 500 Index over six decades; it’s an unparalleled achievement that has made him the greatest investor of all time and transformed Berkshire into a powerhouse with a market capitalization of nearly US$1 trillion ($1.4 trillion). Continuity is the wish that Greg Abel, who succeeded Buffett this year and chairs Berkshire’s annual meeting for the first time, can repeat Buffett’s success.
Stock pickers only have a certain amount of leverage in their quest to beat the market. Buffett’s use of value, quality, and influence is well known, but he has also made good use of the other two: size and concentration. In Berkshire’s early days, Buffett managed a relatively modest sum, which allowed him to buy smaller, under-the-radar companies. This size advantage gradually disappeared as word spread about Buffett’s investing prowess and the money started flowing in. What remained was Buffett’s willingness to invest his company’s stock portfolio in a handful of companies. Even now, almost 70 percent of Berkshire’s shares are in six businesses.
Few stock pickers have the courage to have such a concentrated portfolio. In his first annual letter, Abel promised that “this intense approach will continue.” However, he also noted that Berkshire “also holds significant positions in a small number of other companies,” leaving open the possibility that those investments could also become “core holdings.” So, we will see this concentration.
Either way, Abel’s biggest problem is size. Buffett often laments that more money means less places to invest. While Berkshire was worth several billion in 1987, it could probably still prey on smaller targets. By the early 2000s, the company was worth many times that figure, limiting Buffett’s ability to deploy capital. It’s perhaps no surprise, then, that Berkshire underperformed the S&P 500 Index by 0.7 points per year from 2003 to 2025, including dividends, a 23-year drought and counting.
The beginning of this period also coincided with the market recovering from the dotcom crash. Buffett, who led the internet bubble in the late 1990s, was quoted as saying he didn’t understand technology stocks. This seemed like a shrewd and prophetic move, considering Berkshire had mostly avoided a tech-driven crash in the early 2000s.
But two decades later, it’s clear that relying on technology was a better move. In fact, tech giants have been among the best performers and could provide a boost to stock pickers like Buffett, who are limited to the biggest companies. Buffett also acknowledged this.
Berkshire now risks making the same mistake with artificial intelligence. “I understand that fewer businesses are a percentage of the whole than they were 10 years ago,” Buffett told CNBC’s Becky Quick. “I haven’t learned any new industries in a few years.”
Setting a new course will be difficult for Abel, at least in the beginning. If it adds exposure to AI, it erodes concentration; If Berkshire replaces old-economy investments like Bank of America, Coca-Cola and Chevron with trendy AI names, it would feel like Buffett making a sharp comeback, and that’s an impression Berkshire is keen to avoid.
But Abel will need to deliver more growth if he wants to rekindle the old Buffett magic. Since 1988, the first year for which Berkshire data is available electronically, the company’s shares have returned about 16 percent annually through 2025; That’s 4 percentage points per year better than the S&P 500. Nearly 90 percent of that return came from Berkshire’s revenue growth. Valuation and margin expansion contributed little, and dividends contributed nothing.
While visibility into Berkshire’s private holdings is limited, the prospects for revenue growth for its public companies appear slim. The six companies that make up most of the stock portfolio — Apple, Chevron, Bank of America, Coca-Cola, American Express and Moody’s — are expected to grow sales by an average of 5 percent annually over the next four years, according to estimates compiled by Bloomberg.
Meanwhile, tech giants to which Berkshire has little or no exposure are poised for much bigger growth. Analysts expect dotcom era favorites Microsoft, Amazon.com and Alphabet to increase their sales by an average of 15 percent annually. Broadcom and Advanced Micro Devices, two companies powering artificial intelligence, are each expected to grow revenue by 29 percent annually. Given the heavy weight of these companies in the S&P 500, it won’t be easy for Berkshire to outperform the market without them.
The thing about concentration – and the reason most stock pickers avoid it – is that there is so much tied up in a few names. Abel’s stock portfolio, like Buffett’s, will likely be benchmarked against the S&P 500. As it stands, Abel believes the largely financial, energy and soda business can keep up with technology. A bold bet indeed.
Bloomberg
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