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The rap on BRK growth prospects, at least as compared to its history, is that the enormous size engendered by its success makes it increasingly difficult to move the needle.

Really exciting growth tends to happen in smaller companies. But today even spectacular performance by a five-hundred million dollar acquisition is likely to barely budge Berkshire earnings. In the early years that would have been enormous. Now it approaches insignificance. So great decisions have far greater impact in the beginning, when the enterprise is relatively small, than they do now, when the enterprise is among the largest in the world.

Big acquisitions originate at the top, and that seem likely to continue as long as WEB — the greatest investor of all time — is at the helm.

Todd and Ted appear to be an attempt to mitigate the size encumbrance by multiplying the prospect of gains from smaller investments. I believe the initial 3% stake in PCP was acquired by T/T. Leave it to WEB to mine synergy from this.

PCP brings a talented acquirer on board in a position of significant influence. If PCP, a tenth the size of BRK, continues to sensibly agglomerate in its rapidly growing niche, then BRK is assured dominance in that significant sphere of economic activity.

It's no accident that recently acquired Heinz has rapidly added the most popular mustard to its dominant ketchup in merging with Kraft.

So the way forward with comparable gains may be through acquisition delegation, both to investing geniuses like T/T and to operating entities like PCP, as well as to outside investment partners like 3G. It's long been known that Berkshire companies are encouraged to seek opportunities for organic growth within their sectors, resting assured there's ample financing available for any qualified opportunities.

All this suggests to me that highly decentralized diversification, implemented within a lifetime of sensible acquisitions, may be the key to perpetuating extraordinarily rapid growth.

What are your thoughts on this?

Tom
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Dear Tom,

I hope that you are correct....  Because we are going to live off of Berkshire for a good while.

Size is an anchor.  Warren cannot buy everything and beat the market, because the more he buys, the more he becomes "the market". 

How can Warren outperform himself?  

This is an obviously simplistic view... but is there some merit in it?

On the other hand if Warren buys half of all of the Wilshire 5000, or whatever, but only the "good" half, how would that play out?

Seems that the game gets harder as size grows.  

But then, what the heck do I know?  

Sincerely,

jan

:^|
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Size is an anchor. Warren cannot buy everything and beat the market, because the more he buys, the more he becomes "the market".

I'm thinking that highly diversified acquisitions executed by talented investors with disparate corporate origins may optimize upon small company growth. That strikes me as Berkshire today, infused with the spirit of Buffett.

Not all BRK holdings are the same, of course. Newspapers and candies, while profitable, aren't in explosive market niches. Aerospace (PCP) is explosive. Transportation (BNSF) is explosive.

Yet acquisition opportunities for BNSF are likely limited, as railroading is mature and stable. Of course that outlook could quickly change given a broadened self-identity for BNSF.

I'm intrigued by the prospect of highly diversified quality acquisitions offsetting any encumbrance of size.

Tom
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"What are your thoughts on this?"

I think your "decentralized diversification" hits the nail on the head.

Obviously as BRK gets bigger it takes a bigger acquisition to move the needle (and the universe of companies that BRK can buy that would move the needle gets smaller and smaller). One possible solution to the problem is that instead of looking at big companies to move the needle, why not acquire a whole bunch of smaller companies to that would collectively move the needle. The problem with that solution is complexity. Buffett does not have the bandwidth the investigate, purchase, and then oversee the thousands of small companies it would require to collectively move the needle at Berkshire.

So unless we figure out how to clone Buffett and make 100 copies of him and give each copy $1 billion to invest in small companies, this isn't really an option.

Buffett's solution seems to be to purchase companies that are capital intensive (energy, railroad) or companies that have a history of smart, profitable acquisitions within their industry. So while Matt Rose at BNSF is not a clone of Buffett, he has shown that the railroad industry is within his circle of competence and he can smartly invest money in that area. So rather than a clone of Buffett investing $1 billion in small companies, we have Matt Rose investing billions in track and rolling stock. Greg Able is investing billions in acquiring energy assets. The folks at Homeservices are spending money acquiring real estate companies. The folks at the auto dealer group we purchased have shown they know how to profitably acquire auto dealers. Lubrizol can spend a couple billion acquiring companies in the lubricant market. Now PCP can continue to spend money acquiring aerospace and investment casting companies.

When Matt Rose or Greg Able or any of these other companies invest money in acquiring other companies it requires very little bandwidth from Buffett. He just needs to manage their overall collective results. Buffett has essentially found a way to decentralize certain investment decisions which help ameliorate some of the problems of size.

While I don't think Matt Rose, Greg Able, and all of the other subs will generate the extraordinary returns a clone of Buffett investing $1 billion would, I do think they will be able to collectively generate above market returns. Combine slightly above market returns with negative cost leverage (float) and you will get growth to get excited about.

When Buffett purchased BNSF, Lubrizol, some of the energy assets, and now PCP my first reaction was that they were not exactly great deals. They were decent to slightly above average companies at ok prices. Nothing to get too excited about. An added bonus however is that they are also potential conduits for additional investments that do not burden Buffett. They are potential decentralized investment decisions. Almost (but not quite) Buffett clones that can find opportunities for above market rates for investments.

Take PCP as an example. Someone who had $15 billion to invest could leverage up and borrow a lot of money to purchase all of PCP. It would probably work out since PCP has decent cash flow, but that company would end up starving the company of investment in order to pay down debt. The company wouldn't grow. However under Berkshire, it can take on additional funds to acquire smaller companies in the industry and profitably grow.

PCP is worth more to someone like Buffett who is looking to invest excess capital than it is to someone looking to lever up and starve a company.
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"Yet acquisition opportunities for BNSF are likely limited, as railroading is mature and stable."

Acquisition opportunities for BNSF may be limited, but investment opportunities are not. 10 or 20 years from now, I am fairly sure BNSF will be investing more money in track and rolling stock than they are currently investing today.
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So the way forward with comparable gains may be through acquisition delegation, both to investing geniuses like T/T and to operating entities like PCP, as well as to outside investment partners like 3G. It's long been known that Berkshire companies are encouraged to seek opportunities for organic growth within their sectors, resting assured there's ample financing available for any qualified opportunities.


Spot on there.

Get more smart people to help lift the heavy load of huge assets.

Certainly buying capital-intensive businesses (the opposite of what Buffett used to seek) like Mid-American and Burlington Northern certainly relieves some of the cash that would be heading to Omaha, at a all-but-guaranteed, respectable-but-not-exciting rate of return.

The the whole teaming up with 3G is brilliant this way: get someone who is proven successful with very large acquisitions, and again, Buffett doesn't have to do the heavy lifting (just heavy financing).

Of course, Ted and Todd are great to be able to scope out smaller investments. It would be nice to get one or two more like them...espcecially while Buffett is around to make the choice. If one of them left due to health or outside enticement, that would not be ideal once Buffett steps down.

And it seems to me that Buffett has made much more mention of late of the importance of the subsidiaries making acquisitions.


I like it.
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Warren cannot buy everything and beat the market, because the more he buys, the more he becomes "the market".


Berkshire is likely less than 2% of the value of the S/P 500. And there's the whole international market.

So there's a loooongg way to go before it's even vaguely approaching "the market".

Moreover, they can eventually use aggressive share repurchases to increase per-share value without having to grow assets a dime. This will be very important some day.
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Of course, Ted and Todd are great to be able to scope out smaller investments.

And bigger ones, like the $37B PCP acquisition.

Berkshire Hathaway is no stranger to Precision Castparts, having held a 3% stake in the company for several years. “I’ve got to give credit to Todd Combs for this deal,” Buffett said on CNBC. “I had really never heard about the company before that, and Todd told me a lot about it.”

(or, somewhat contradictorily:)

“I’ve admired P.C.C.’s operation for a long time,” Mr. Buffett said in a statement on Monday. “For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.”

Under the terms of the deal, Berkshire will pay $235 a share for Precision Castparts, representing a 21 percent premium to its closing price on Friday.

Even by Mr. Buffett’s admission, that is a high price to pay. And the billionaire said in an interview with CNBC that he was largely unaware of Precision Castparts until Todd Combs, one of his two investment managers, began investing in the metal parts company in 2012.



The $37.2B number includes $4.7B in debt. But that debt will not be paid off, and indeed $10B of the acquisition price will be financed with new debt, so this is really only a use of $23B. In any case, not a small investment. Another example of a big investment initiated by a Berkshire lieutenant is Lubrizol, which used about $8B in cash.

Regards, DTB
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“I had really never heard about the company before that, and Todd told me a lot about it.”
(or, somewhat contradictorily:)
“I’ve admired P.C.C.’s operation for a long time,”


I notice that pair of comments as well.
It's probably fair to note that Todd Combs has held this position for a while now, so to that extent they can both be true.

The first big is perhaps a exaggeration due to misplaced modest, though.
I'm pretty sure he has had a glance at it from time to time, being in the top 250 biggest US firms.
Remember his advice when someone asked his suggested approach for getting started on
value investing with the unmanageable thousands of firms out there? "Start at A".
I doubt there are many firms out there of any size that Mr Buffett has not looked at.

However one can look at a firm for quite a long time before having the "aha" moment when you see the thing that
makes it an interesting investment candidate: the quirk of their business economics that might lead to a moat.
That "aha" can be a big thing, and if it was TC's, then that's why he deserves the credit even if Mr Buffett "knew" about the firm.

Value investing is sometimes like a game of go, where pointing out an "obvious" course of
action to someone can be such a big deal that, by tradition, one would keep a pole stuck
in the ground next to the board...for the head of anyone who pointed out a possible move.

Jim
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Can we stick to the simpler explanation that not all of Buffett's utterences are truthful or worthy of attention? "hadn't heard about" and "admired" are impossible to reconcile.

The emperor is probably not above lying to make his subordinates look good. At least that's better than most bosses who would rather lie for the opposite reasons.

I think every value investor is/was aware of PCP so it is pretty much impossible that Buffett had not heard of it.
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So unless we figure out how to clone Buffett and make 100 copies of him and give each copy $1 billion to invest in small companies, this isn't really an optio

Hasn't Warren said 90% of his job is simple? That's the "no" part ("too hard", "technology", "no moat", etc.) So we don't need 100 copies of Buffett, we just need him to sit and keep tossing thing off the list, then find a few more Todds and Teds and whoever to run through the 10% that's left.

I mean, how hard can it be? ;)
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So the way forward with comparable gains may be through acquisition delegation, both to investing geniuses like T/T and to operating entities like PCP, as well as to outside investment partners like 3G. It's long been known that Berkshire companies are encouraged to seek opportunities for organic growth within their sectors, resting assured there's ample financing available for any qualified opportunities.




I ran across this article, which is very pertinent to this discussion. Nothing earth-shattering, but worth a look:

http://blogs.wsj.com/moneybeat/2015/08/10/precision-castpart...

Such bolt-on deals are attractive to Mr. Buffett because each one is relatively low-risk, yet together they can add substantially to earnings over time. He trusts his managers to pick attractive targets in their various areas of expertise so that he doesn’t have to be an expert at everything...Bolt-on deals have become increasingly important because the bigger Berkshire gets, the fewer the opportunities to pursue gigantic deals that meet Mr. Buffett’s criteria. Across the entire Berkshire family, Mr. Buffett said the company had agreed 31 bolt-ons in 2014, committing $7.8 billion in aggregate.
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