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The Most Important Thing I Hope to Learn from Warren Buffett This Weekend

Source: iStock photos.

Under Warren Buffett's stewardship over the last 50 years, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has evolved from a little textile business into a massive conglomerate worth hundreds of billions of dollars. He's achieved 19.2% compound annual gain in book value per year during that half-century, a feat that boggles the mind.

And while I'm attending the company's annual meeting this year, I'm sure I'll hear plenty about what got Berkshire to this point. But what I really want to learn is how he plans to grow Berkshire from here.

Growth is harder once you're a giant
Being as big and diverse as Berkshire Hathaway does have drawbacks. The biggest of which is that, when your company has a market cap of more than $360 billion, it's hard to find things that will move the needle.

Buffett acknowledged this in 1999, noting:

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. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

I'm hoping Buffett calls me up and offers to trade net worths. I'm willing to give up my stock market advantage in exchange for a cool $60 billion or so.

Berkshire's business growth is also slowing. That 19.2% compound annual gain in book value I mentioned earlier? In the past five years, Berkshire's book value grew by between 4.6% and 18.2% a year during that time. Still impressive (and a nice turnaround from the 9.6% book value shrinkage Berkshire suffered in 2008), but not on the same level as its historical averages.

And there's more
There's another drawback to Berkshire's reach into so many different industries: It comes under a lot of different threats.

In his annual letter, Buffett identified several potential risks ahead. Two examples: Coal and driverless cars.

As Buffett noted: "BNSF, along with other railroads, is certain to lose significant coal volume over the next decade."

No argument there -- the U.S. coal industry is in a structural decline, and with alternatives such as natural gas and renewables, it's pretty clear that coal transportation volume is going to decrease. And given that coal represented over 38% of U.S. rail tonnage in 2014, that's going to be a big shock to all the railroads. I'd love to learn how Buffett expects freight hauler BNSF to replace that lost tonnage.

As for the arrival of autonomous vehicles, he said, "At some point in the future -- though not, in my view, for a long time -- GEICO's premium volume may shrink because of driverless cars."

The business concern here is that auto insurers could have more difficulty making money in a world of driverless cars -- a world where there would be fewer accidents since those cars would behave in a rational and cautious way, with excellent (computer) reflexes. It is a big potential threat over the very long term. But until then, human drivers remain a big threat to driverless cars. According to data cited by Bloomberg in late 2015, driverless cars have so far doubled the accident volume of human-driven cars. The reason is simple: Driverless cars tend to be more cautious than human drivers and follow the law at all times, so human drivers tend to accidentally crash into them because they're...well, not behaving like humans. The short answer here is that car insurers are probably fine until driverless cars are widespread and affordable -- a shift that is likely a ways off.

There were a number of other concerns mentioned (print circulation among newspapers continues to fall; renewable energy could end up threatening utilities; etc.). But here's the funny thing about diversity: Though it means more threats, it also makes each a lot less threatening. As Buffett noted: "None of these problems ... is crucial to Berkshire's long-term well-being."

So, how will Buffett ignite growth?
I'm hoping to find out on Saturday. And I'll be sure to report back.

But Berkshire's past can offer some clues. Whether it's partial ownership via purchasing shares or full ownership through buyouts, Buffett usually invests in certain types of businesses. He seeks out:

  • Businesses that already align with his general philosophy opposing bureaucracy and red tape. After all, if he buys well-managed companies "that have long been run by cost-conscious and efficient managers," all Berkshire has to do is provide money for capital expenditures -- knowing that the money will be well-spent -- and collect profits.
  • Moated businesses, preferably with strong brands attached. Two great examples: GEICO and Coca-Cola. GEICO, which is wholly owned by Berkshire, is the low-cost operator in auto insurance, and it has more than quadrupled its market share over the past 20 years (11.4% in 2015 compared to 2.5% in 1995, when Berkshire bought it). Berkshire owns roughly 9.3% of Coca-Cola, which is a brand you may have heard of.
  • Businesses that provide necessary goods and services. Take Precision Castparts, for example, which Berkshire recently bought for over $32 billion in cash. The company makes parts which are, to quote Buffett, "key components in most large aircraft." Or think about GEICO. As Buffett noted in his annual letter, "No one likes to buy auto insurance. Almost everyone, though, likes to drive." These (and most of the dozens of other businesses Berkshire owns either partially or totally) aren't in danger of getting wiped out any time soon.

Just a few days left
I'm heading to Omaha to this weekend to learn more about the future of Berkshire Hathaway -- a future that I'm particularly interested in as a current shareholder. Check back here regularly for updates from the meeting and to learn more about Buffett, Berkshire, and the fantastic returns long-term investing can produce.