Why Buffett’s US$10 billion haul won’t be the last

Warren Buffett’s investing genius pays off once again. Berkshire Hathaway  (NYSE: BRK-A )   (NYSE: BRK-B)  has now racked up a whopping US$10 billion profit on investments made during the financial crisis.

That’s no small sum, although against the backdrop of a company worth more than US$280 billion, it isn’t a game-changing sum, either.

But focusing on the total return really misses the point: Buffett’s Berkshire Hathaway is poised to do this time and time again.

Berkshire’s advantage

Chances are good that if you stopped someone in the street in 1960 to tell them that two men would run a hedge fund so large that it was worth 1.5% of all U.S. stock market value, they’d call you insane.

There is just no way that two men would ever be allowed to run a hedge fund worth 1.5% of the total U.S. stock market. But that’s essentially what Berkshire is — a massive hedge fund with Buffett and Charlie Munger at the helm.

Some worry that Berkshire’s size may limit future returns. Scale means Buffett and Munger have to find both good ideas, and big ideas. Rarely do you get both of those requirements in a single investment. There are many mispriced US$100 million companies, but very few mispriced US$50 billion companies. Scale does hurt Berkshire here.

But it also gives Berkshire Hathaway an advantage in times of crisis — times when someone needs a lot of money right away, and when there are very few people willing to be the banker of last resort. As Buffett says, “you only find out who is swimming naked when the tide goes out.”

A model for Berkshire Hathaway

Berkshire’s advantage can be explained in a much smaller corner of the investment universe. Here at The Motley Fool, I spend a lot of time covering small financiers like Ares Capital (NASDAQ: ARCC) , a private-equity investor with just US$4.6 billion in market value.

Now, as a US$4.6 billion company by market cap, Ares Capital is relatively tiny. In the market for private finance, however, Ares is huge.

Because Ares is a relatively large private equity financier, it often gets first look from would-be borrowers. There’s a reason people go to Ares Capital first: Working with Ares reduces execution risk. That is, when Ares Capital commits to a deal, it gives its borrowers confidence that a loan can be made on terms both parties like.

Now, take this thought back to Berkshire Hathaway. When Berkshire made big bets on Goldman Sachs, General Electric, and Bank of America, he bought in at a time when these companies couldn’t inspire the confidence of the public to open their wallets.

Goldman Sachs, GE, and B of A needed money, but they faced terrible execution risk — the risk that a deal wouldn’t go through at the right time, the right size, or at the right price. For this, they paid dearly for the certainty that Berkshire Hathaway had the cash they needed with the capacity to deliver the money immediately.

Berkshire’s US$10 billion profit from investments during the financial crisis may seem like a one-time event, but going forward, we can expect Berkshire to play a part in any and all future credit crunches. The company has some US$35 billion in cash that it can use strategically when the opportunity arises.

You can bet the next time someone desperately needs cash, Berkshire will be there to help. But only at a very, very high price that would leave Berkshire with a big return. That’s Berkshire’s big advantage, and it exists with or without Buffett calling the shots.

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A version of this article, written by Jordan Wathen, originally appeared on

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