Where Will Berkshire Hathaway Be in 10 Years?

Can Berkshire Hathaway stock beat the market over the next decade? The answer might surprise you.

Berkshire Hathaway (BRK.A -0.45%) (BRK.B -0.28%) stock has been a terrific investment for patient shareholders. Since 1965, shares have risen in value by nearly 4,000,000%.

But what does the future look like for this iconic company? The answer might surprise you.

These Berkshire statistics are surprising

Warren Buffett’s claim to fame is that he has been able to consistently beat the market for far longer than nearly anyone else. That’s an incredibly difficult feat to pull off. Over the past 20 years, around 95% of funds failed to beat their index. Buffett, meanwhile, has trounced the index. Since inception, shares of Berkshire Hathaway have averaged annual returns of around 20%, roughly double the rate of the S&P 500 over the same time period.

There’s only one problem: Berkshire’s returns have slowed heavily in recent years. Over the past decade, for instance, Berkshire stock underperformed the market by around 2%. This is a rare occurrence, but it makes sense given the company’s circumstances. In the 1980s, for instance, Berkshire stock regularly rose more than 30% in value in a single year. In 1985, it nearly doubled in value. Over the last decade, however, it failed to achieve annual returns of 30% or more even once. The issue isn’t poor investing, but that the game has grown significantly more difficult.

In 1999, Buffett joked that he could post 50% annual returns if he managed only $1 million. It’s a huge structural advantage not to have a lot of money,” he explained. “I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Today, Berkshire’s cash pile alone is worth around $189 billion. Its total market cap is around $900 billion. For the stock to rise 10%, the company would need to add another $90 billion in value. To put that into perspective, around 400 of the companies in the S&P 500 have market caps under $90 billion. To add another 10% to its stock price, Berkshire essentially needs to create enough value that would, on its own, be one of the top 100 most valuable companies in America. Then it needs to replicate this feat again the following year to an even larger degree.

^SPXTR data by YCharts

These 2 things are very likely to happen

Whatever happens to Berkshire over the next decade, one thing is clear: Its returns likely won’t match anything it has achieved in previous decades. The company is simply too big to keep doubling in size at the rate it’s used to. “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” Buffett wrote in a recent shareholder letter. “All in all, we have no possibility of eye-popping performance.”

The second thing to expect is for Berkshire to increasingly be run by people other than Buffett, who will turn 94 this summer. Already, Buffett has handed over large sections of the portfolio to trusted lieutenants, including Todd Combs and Ted Weschler. It has been reported that one of these men initiated Berkshire’s $189 billion bet on Apple, one of the largest and most successful Berkshire investments in recent history.

For his part, Buffett isn’t worried about the transition. He’s had succession plans in place for some time, and his recent letter shows confidence that these patient personnel investments will pay off. “By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions,” Buffett wrote. “And we now have a small cadre of longtime managers who never muse about going elsewhere and who regard 65 as just another birthday.”

Where will Berkshire be ten years from now? Trusted lieutenants including Combs and Weschler have already been with the company for years. Guided by their experience and acumen, expect Berkshire’s current portfolio of public and private business to do well. But it will be harder than ever for the company to beat the market by any significant margin. This is still a wonderful business to bet on, but the decade ahead will likely be characterized by slow and steady moves that focus more on patient asset allocation than superstar bets.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.

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