Owen Smith

The historic outperformance of Berkshire Hathaway at 19.7% per year, despite its gargantuan size, forces us to ask whether conventional wisdom about the size's impact on alpha prevents us from appreciating the ability of superior execution. If we were to evaluate this strategy today, with fresh eyes, without considering its legacy, would we take this investment or would we turn away from it because of its sheer scale? The fact that they have been able to continue generating alpha indicates that discipline in capital allocation and diversification can indeed bypass perceived limits. For example, their ability to hold entire companies or significant positions in large public firms offers a flexibility that most funds do not possess, allowing them to hold less performing assets or walk away from mediocre opportunities, even on a massive scale.

The idea that asset growth automatically negates the ability to generate alpha ignores the unique strategies that maintain performance.
Ask yourself if, without the prior investment in the thesis of 'size as a barrier,' we would have this hasty conclusion about Berkshire Hathaway's historical performance.
Their success relies on an investment approach that is not limited to small caps alone but on acquiring quality companies at scale, such as the purchase of Burlington Northern Santa Fe.
Would we have the same opinion if we had not already invested our attention in this reductive framework?

The assertion that Berkshire Hathaway's historical growth was not compromised by its size does not account for the unique circumstances that enabled this performance. If we were to evaluate whether this model of acquiring entire companies would still be viable for a new fund, we would probably not re-enter this strategy. Market constraints and the lack of opportunities at this scale no longer allow generating such alpha for most managers. For example, even with enormous capital, it is now difficult to find a company like See's Candies at a price that would yield similar returns to those Buffett achieved.

Berkshire Hathaway's historical annual return of 19.7% is an undeniable fact, but with fresh eyes, would we invest today in this same model knowing the impact of size on alpha?
The notion that historical growth has not been compromised by increasing size is a classic case of sunk cost; the market has evolved.
Large-scale opportunities capable of absorbing billions are inherently limited, making sustainable outperformance more complex.
Even Buffett has admitted that finding "elephants" is increasingly difficult; for example, the Japanese market does not offer the liquidity needed for such allocations without impacting prices.