Is Warren Buffett's Berkshire Hathaway Losing Its Edge?


One of the more interesting observations in the March investor letter from Pimco’s Bill Gross is that the zero-interest rate policy of the Fed might be undermining the business model of one of America’s most successful public companies: Warren Buffett’s Berkshire Hathaway.

Gross explains that one of Berkshire Hathaway’s key advantages was the ability to access internal funding from its insurance businesses. This “free float” gave Berkshire Hathaway a competitive advantage over those who had to pay more for funding from outside lenders.

Investments that might not be profitable at market rates, could be profitable for Buffett. And investments that would be profitable at market rates, could be wildly profitable for Buffett.

Here’s Gross:

And here’s one of the more interesting anecdotal observations on our current zero-based environment, one to which my investment paragon – Warren Buffett – would probably immediately admit. His business model – and that of Berkshire Hathaway – has long benefitted from what he has described as “free float.” Those annual policy payments, whether for hurricane, life or automobile insurance, have long given him a competitive funding advantage over other business models that couldn’t borrow for “free.” Today, however, almost any large business or wealthy individual can borrow or lever up with minimal interest expense. Buffett’s “Omaha/West Coast” offense is being duplicated around the world thanks to central bank monetary policies, placing an increasing emphasis on stock and investment selection as opposed to business model liability funding. Buffett will succeed based upon his continued strong offensive play calling, but the rules of the game are changing.

That ending about Buffett succeeding no matter what is very polite and politic on Gross’s part. No one like to be seen bashing Warren Buffett.

But the truth is that low rates hurt Buffett in more ways than just cutting at the free float. Low policy rates compress interest rates in the private sector, diminishing the value of things like being triple-A rated. So Berkshire is losing a part of that edge as well.

Buffett is still the Oracle of Omaha. But for the first time in many years, he has a little less of an advantage over all those other folks laboring in the agora.

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