Buffet's Problem

During 2013 as I heard how Berkshire Hathaway (News always just say Buffet this and that..) invested into this and that I've always checked how I see that specific company. And sometimes I would not support that investment decision. 

One example being International Business Machines Corp (IBM)

I don't understand why that investment was made so early.  IBM is strongly overvalued and price had been coming down all year. The company is in the middle of changes to return back to the good track again as they are struggling with profitability. As a rational investor that investment should have waited until the price is right. In the long-term a company like IBM is probably always a good investment. But with price paid that should be about $190 per stock and Berkshire Hathaway owns 68.12 million shares... It is going to take a long time for this investment to pay itself back by dividends. We know that Buffet invests for a long long time, pretty much permanently so price rise isn't even important. But a fact such as a troubled company experiencing price decline should matter!

So why? There are more loveable companies to invest in than IBM. But perhaps IBM is seen as a bank. They will (most likely until a huge random event occurs... I can hear Nassim Nicholas Taleb screaming in my mind) continue to be a huge market player and pay large dividends. Still I criticize the timing! So I wonder if this was purely Buffet's own decision. We know he has at least one pupil who is planned to take over the company as Buffet himself retires. 

So.. Why!?

Berkshire Hathaway is too big, they have too much money. Investing into small companies isn't worth the trouble because they are looking for opportunities to invest billions of dollars (IBM, about 13 billion). And the more money they acquire the harder it is to spread it out. Berkshire isn't like Blackrock, they have very different investing methods and as Berkshire gets wealthier their job gets more and more difficult. 

What I mean by all this is that Berkshire Hathaway is about to change. And they have two main problems that are

• Buffet will eventually retire
• Berkshire Hathaway has too much wealth to invest

I am not too confident that people replacing Buffet are able to continue with his investing methods and handle all that wealth. Unless they want to play it safe and just keep everything as it currently is. One thing Berkshire has been quiet about is company purchases outside the U.S. Yes they have done something, but not a whole lot. There are plenty of businesses to buy and stocks to purchase if they start looking more actively into those markets. Then they should be able to invest all their current money in acceptable manner and continue growing for a few more decades before facing this same problem again.

So the third problem I'll point out:

• Too focused on the U.S.

Treat the whole world as your portfolio, not just one country of it.

Some reading on the matter: http://www.bloomberg.com/news/2014-01-02/berkshire-seen-failing-buffett-5-year-test-for-first-time.html


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UPDATE 16th of March 2014 based on news about Berkshire Hathaway's 2013 results.

As we finally got the results of Berkshire's investment portfolio for 2013 two things are clearer:
• Berkshire Hathaway didn't beat the S&P500 index but still provided a lovely return for the long-term (32.4% versus 18.2%).
•BH made $19.5 billion. Therefore they have even more problem of putting their money in to work. I am not saying Buffet isn't a smart enough man to do it and he certainly is not too old for the job. But, more money means more investments and what I fear is that eventually BH's portfolio is so over diversified that returns by percentage measure will keep going lower (Although money wise they are breaking records).