Has Berkshire Hathaway's enormous size become its biggest obstacle to achieving excess returns?

Has Berkshire's Massive Size Become Its Greatest Obstacle to Achieving Excess Returns?

Yes, Berkshire Hathaway's enormous size has indeed become one of its greatest obstacles to achieving excess returns. This point has been repeatedly mentioned and emphasized by Warren Buffett in multiple letters to shareholders. The analysis below covers several key aspects:

1. Warren Buffett’s Own Views

• Buffett explicitly stated years ago: "Size is the anchor of performance." As Berkshire's assets grew from billions to nearly a trillion dollars, finding investment opportunities capable of significantly boosting overall returns has become increasingly difficult.
• In his 2022 shareholder letter, Buffett noted that Berkshire’s current scale necessitates investing in large companies or projects, which are often fully priced by the market. This makes it hard to achieve the kind of excess returns seen in the past through "buying wonderful businesses at fair prices."
• Historically, Berkshire achieved multi-bagger returns on smaller investments (like Coca-Cola or The Washington Post). However, similar opportunities are scarce today because any single investment now has a negligible impact on its massive asset base.

2. Challenges to Value Investing Principles

• Value investing centers on identifying undervalued assets for long-term holding. Yet Berkshire’s size requires enormous capital deployment (often billions per investment), limiting its flexibility to invest in small-to-mid-sized companies or emerging markets.
• For instance, Berkshire now favors acquiring entire companies (like BNSF Railway or Precision Castparts). However, returns from such large acquisitions are typically lower than those from its early smaller investments. Excess returns (alpha) often emerge from market inefficiencies at the periphery—areas where giant funds struggle to operate.

3. Historical Data Evidence

• Berkshire’s annualized returns exceeded 20% from 1965–1990, far outpacing the S&P 500. Since the 21st century began, its excess returns have gradually narrowed, recently aligning closer to market averages (though still slightly ahead).
• The 2023 shareholder letter revealed Berkshire holding massive cash reserves (~$160 billion), partly due to a lack of sufficiently large investment opportunities. This further illustrates the "opportunity cost" imposed by its scale.

4. Not the Sole Obstacle, But Among the Greatest

• Other factors—increased market competition, economic cycles, and high valuations—also impact returns. Yet size remains a fundamental constraint, directly limiting investment diversity and flexibility.
• Buffett advises that smaller investors can leverage their size advantage to pursue high-return opportunities more freely. This explains why Berkshire now focuses more on insurance float, stock buybacks, and stable dividends rather than aggressively chasing alpha.

In summary, Berkshire’s success stems from value investing, but its scale has transformed it from a "hunter" to a "guardian." For individual investors learning Buffett’s principles, it’s crucial to recognize the double-edged sword of scale: smaller size favors excess returns, while larger size prioritizes risk control and long-term stability.