As highly as we Fools think of Warren Buffett and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), we’d be foolish (with a lower-case “f”) to believe any company is truly without risk. With that in mind, here are six ways Berkshire could potentially fail investors going forward: 1. Losing to the market on Buffett’s terms Over the years, Buffett has largely made his name by identifying stocks whose share prices have lagged the intrinsic value of their underlying businesses. As a result, it should come as no surprise that Buffett believes the best way to measure Berkshire’s performance is by calculating its book value….
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As highly as we Fools think of Warren Buffett and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), we’d be foolish (with a lower-case “f”) to believe any company is truly without risk.
With that in mind, here are six ways Berkshire could potentially fail investors going forward:
1. Losing to the market on Buffett’s terms
Over the years, Buffett has largely made his name by identifying stocks whose share prices have lagged the intrinsic value of their underlying businesses. As a result, it should come as no surprise that Buffett believes the best way to measure Berkshire’s performance is by calculating its book value.
Sure enough, Buffett himself lamented Berkshire’s respectable 2012 book value growth of 14.4% as “subpar” after it fell short of the S&P 500’s 16% gain.
What’s more, while Buffett has helped Berkshire’s book value per share rise an astounding 586,817% over the past 48 years (seriously — that’s no typo!), he readily admits that, with Berkshire’s enormous capital base, its book value per share going forward will probably have a hard time increasing “at a rate even close to its past rate.”
2. Losing to the market on Mr. Market’s terms
Even if Berkshire’s book value per share manages to outpace the broader market’s return, you can bet that if the share price lags, many fickle investors still won’t be patient enough to wait for the price to catch up with the value of the business.
Of course, that is part of why it’s so hard to be a value investor, but the fact remains that there will be more years during which Berkshire Hathaway stock will lag the market. For example, look at how much faster Berkshire’s book value has increased relative to both its share price and the S&P 500 over the past five years:
BRK.B Total Return Price data by YCharts
While this isn’t necessarily Berkshire’s fault, you can bet many investors will inevitably perceive it as a failure.
3. Failure to maintain superior management
As Peter Lynch once said, “Go for a business that any idiot can run — because sooner or later, any idiot probably is going to run it.”
Before you go yelling “Blasphemy!” from the rooftops, I’m all too aware that Berkshire’s current management team is as solid as they come. Heck, there are at least six people whom I wouldn’t be surprised to see chosen as Buffett’s eventual successor.
Until that time comes, however, nobody can be positive that Berkshire’s future management team will be able to even partially replicate the success of the unrivaled team that is Buffett and Charlie Munger.
4. Equity portfolio losses
Without a doubt, Buffett has done marvelously well investing both Berkshire’s shareholder equity and insurance float in stocks. Over the years, Buffett has amassed enormous positions in now-legendary stocks such as Coca-Cola (NYSE: KO) , American Express (NYSE: AXP), Wells Fargo (NYSE: WFC), and Procter & Gamble (NYSE: PG). Sure enough, take a look at what Buffett’s patience had achieved with these four stocks as of the end of 2012:
|Company||Shares||% of Company Owned||Cost||Market Value|
|American Express||151,610,700||13.7||$1.29 billion||$8.72 billion|
|Wells Fargo||456,170,061||8.7||$10.91 billion||$15.59 billion|
|Procter & Gamble||52,477,678||1.9||$336 million||$3.56 billion|
|Coca-Cola||400,000,000||8.9||$1.3 billion||$14.5 billion|
Source: Berkshire 2012 Annual Shareholder Letter
Of course, Buffett has been busy preparing his value-investing proteges in Todd Combs and Ted Weschler to take over the portfolio once he’s gone. However, thanks again to Berkshire’s enormous size (and much like the management uncertainties I outlined a moment ago), investors won’t be able to count on seeing Berkshire achieve these types of incredible equity portfolio returns down the road.
5. Underwriting losses
Because Berkshire runs enormous insurance operations through its subsidiaries in GEICO, General Re, and Berkshire Hathaway Reinsurance Group, the company is also subject to insurance risks, including natural disasters and acts of terrorism.
Putting aside the fact Berkshire has admittedly operated at an underwriting profit for the past 10 consecutive years, if a truly catastrophic event were to occur, Buffett’s company would almost certainly feel the hurt.
6. Non-insurance business losses
As is the current case with the rest of Berkshire’s operations, its non-insurance businesses also seem to be firing on all cylinders as America continues to exit its most recent financial crisis. To be honest, given the enduring nature and diversity of Berkshire’s outstanding non-insurance subs, I have a hard time picturing a scenario where any one of these companies could fold; the largest of them are composed of Burlington Northern, metalworking company Iscar, chemical specialist Lubrizol, manufacturing equipment maker Marmon, and MidAmerican Energy. More recently, remember, Buffett acquired 50% of Heinz in a joint deal with investment firm 3G Capital.
Even then, we should never say never, right? Should the country once again dive into another brutal recession, Berkshire’s non-insurance businesses would at the very least suffer from an earnings standpoint.
In the end, given everything Warren Buffett has done to expand Berkshire’s businesses and moat, I’m tempted to believe I’m more likely to win the lottery than to actually see Berkshire fail in all these areas simultaneously over the long run. As a result, short of Armageddon or total anarchy, it’s a safe bet that Berkshire Hathaway will probably be around for the foreseeable future.
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A version of this article, written by Steve Symington, originally appeared on fool.com.