If you invested in Berkshire Hathaway when Warren Buffett took control back in 1965, you couldn’t have done better even if you won the lottery.
Buffett bought an ailing textile mill and turned it into a money-making machine that is now worth more than $350 billion.
Buffett, by all measures, is considered one of the greatest investors of our time. No one has compounded money at such a high rate, 20.8%, and for as long as he did (more than 50 years).
A $10,000 investment in Berkshire in 1965 would now be worth more than $153 million.
But… Berkshire’s total return over the past 50 years only tells half the story.
During Berkshire’s growth phase, from 1965 to 1995, it grew at a 28% compounded annual growth rate. But as Berkshire started to grow, the rate of return started to fall.
Over the past 20 years, from 1995 to 2015, Berkshire grew at only at a 13.9% compounded annual growth rate… nothing to sneeze at, but less than half the return achieved when Berkshire was a much smaller company.
It’s not like the drop in returns was unexpected.
For years Buffett was telling shareholders at the annual meetings not to expect great returns going forward. Since Berkshire was now a much larger company, the law of “large numbers” was catching up to it.
Buffett said, “there’s no question size is an anchor to performance.”
In order to keep Berkshire growing, Buffett has to find investments for the billions of dollars that Berkshire generates every year.
He needs to continue to make major acquisitions to maintain growth. That is why Buffett talks about his searching for “elephants” – mega-deals that are in the $20+ billion range.
The universe of companies for Berkshire to acquire continues to shrink as the company continues to grow. Berkshire needs bigger deals in order to “move the needle.” Small deals just won’t cut it.
Very few companies have such a problem. It Berkshire continues to have a hard time finding sizable acquisitions, the laws of gravity will take over and performance will begin to fall.
If you missed investing in Berkshire’s “growth phase” when it was able to compound money at 28%... all is not lost.
After careful research we’ve found a stock that has been able to beat Buffett over the past 20 years by a wide margin.
In addition to this company having great management and competitive advantages, it has one thing Buffett would give his right arm for: it is only a fraction of the size of Berkshire.
In an interview in 1999, Buffett was sounding off on how difficult it was to invest large sums of money. He was yearning for the days when he first started out in 1950s:
“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money."
Buffett went on to say that if he had only $1 million to invest, he could “guarantee” that he would make 50% a year.
Company: Berkshire Hathaway
Market Cap: $426.372 billion
Sector: Insurance- Diversified industries
The company below is only a fraction of the size of Berkshire, and has outperformed Berkshire over the past 20 years by a wide margin. It could be a long while before the law of large numbers slows down its performance.
Company: Charles Schwab Corp.
Market Cap: $57.202 (7x smaller than Berkshire)
Sector: Financial Services
The Charles Schwab Corporation (NYSE: SCHW) is a savings and loan holding company headquartered in San Francisco, California. SCHW was incorporated in 1986 and engages, through its subsidiaries, in wealth management, securities brokerage, banking, money management, custody, and financial advisory services.
Recognizing the benefits of having a clear strategy, management has developed a framework that consists of a purpose, vision, and values guided by the Company’s “Through Clients’ Eyes” strategy. The Company’s stated purpose is to champion every client’s goals with passion and integrity, believing the best long-term strategy is one that puts clients’ perspectives, needs, and desires at the forefront. The Company’s vision is to be the most trusted leader in investment services.
On December 31, 2016, the Company had $2.779 trillion in client assets, 10.155 million active brokerage accounts, and 355 branches in all but six states (plus London and Puerto Rico).
Why we like it
- Discount brokers such as SCHW should continue to gain market share as investors move away from active management to passive management. DIY and cost-sensitive investors continue to leave other financial service providers and open accounts with SCHW.
- SCHW continues to expand: the company added more than 217,000 new brokerage accounts in the second quarter of 2015 and $27 billion of core net new assets.
- SCHW has grown core net assets by more than $100 billion in each of the past four years.
- SCHW would be a big beneficiary of an interest rate increase. The company can begin charging management fees on money market funds, which are being waived now due to low-interest rates, which will boost earnings considerably.