2013: Will Berkshire's size limit its future returns?

WARREN BUFFETT: OK. We now have a short seller in a first, I believe, at any meeting, Doug Kass.

DOUG KASS: Thank you, Warren and Charlie. Thanks for this unusual invitation. I’m honored, and I look forward to playing the role of Daniel in the lion’s den in front of 45,000 of your closest friends and greatest admirers.

WARREN BUFFETT: You can bring your own crowd next year. (Laughter)

DOUG KASS: I would note, you have me asking the last question in the group, though.

My first question is a follow-up to Carol Loomis’s first question. Warren, it’s said that size matters.

WARREN BUFFETT: It does. (Laughter)

DOUG KASS: In the past, Berkshire has purchased cheap or wholesale. For example, GEICO, MidAmerican, your initial purchase of Coca-Cola.

And, arguably, your company has shifted to becoming a buyer of pricier and more mature businesses, for example, IBM, Burlington Northern, Heinz, and Lubrizol. These were all done at prices, sales, earnings, book value multiples, well above your prior acquisitions and after the stock prices rose.

Many of the recent buys might be great additions to Berkshire’s portfolio of companies; however, the relatively high prices paid for these investments could potentially result in a lower return on invested capital.

You used to hunt gazelles. Now you’re hunting elephants. As Berkshire gets bigger, it’s harder to move the needle.

To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise.

Is Berkshire morphing into a stock that has become to resemble an index fund and that, perhaps, is more appropriate for widows and orphans, rather than past investors who sought out differentiated and superior compounded growth?

WARREN BUFFETT: Yeah. There’s no question that we cannot do as well as we did in the past, and size is a factor.

Actually, the — it depends on the nature of markets, too. We might — there will be times when we’ll run into bad markets, and sometimes there our size can even be an advantage. It may well have been in 2008.

But there — I would take exception to the fact that we paid fancier prices in some cases than, say — in GEICO, I think we paid 20 times earnings and a fairly-sized — good-sized — multiple of book value.

So we have paid up — partly at Charlie’s urging — we’ve paid up for good businesses more than we would have 30 or 40 years ago.

But it’s tougher as we get bigger, I we’ve always known that would be the case.

But even with some diminution from returns of the past, they still can be satisfactory and we are willing — there’s companies we should of bought 30 or 40 years ago that looked higher priced then, but we now realize that paying up for an extraordinary business is not a mistake.

Charlie, what would you say?

CHARLIE MUNGER: Well, we’ve said over and over again to this group that we can’t do as well in percentage terms per annum in the future as we did in our early days.

But I think I can make the short seller’s argument even better than he did, and I’ll try and do that.

If you look at the oil companies that got really big in the past history of the world, the record is not all that good.

If you stop to think about it, Rockefeller’s Standard Oil is practically the only one, after it got monstrous, continued to do monstrously well.

So, when we think we’re going to do pretty well in spite of getting very big, we’re telling you we think we’ll do a little better than the giants of the past. We think we’ve got a better system.

We don’t have a better system than riding up oil, you know, but we have a better system than most other people.

WARREN BUFFETT: Yeah. In terms of the acquisitions we’ve made in the last five years, I think we feel pretty good about those and — overall — and, obviously, including the Heinz.

We are buying some very good businesses.

We actually, as we pointed out, we own eight different businesses that would each be on the Fortune 500 list if it was a separate company, and then in a few months, we’ll own half of another one, so we’ll have eight-and-a-half, in effect.

Well, you haven’t convinced me yet to sell the stock, Doug, but keep working. (Laughter)