That’s why Warren Buffett’s investment holding company Berkshire Hathaway is like a perpetual motion machine

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• Berkshire Hathaway as the perpetual motion machine of the stock world
• Warren Buffett’s investment model leads to consistent cash flows
• Yield growth through reinvestment, but difficult at times

While perpetuum mobile will always remain a theoretical construct in the real world, according to “Aktienwelt360” there are certainly some in the investment universe. A perpetuum mobile is defined as a share that simply always generates returns for its investors without them having to do anything. According to the financial website, the prime example of this is provided by none other than stock market legend Warren Buffett with his investment holding company Berkshire Hathaway. But even if the business model of Warren Buffett and his deputy Charlie Munger has been successful for decades, the perpetuum mobile Berkshire Hathaway doesn’t always run smoothly.

Regular and stable cash flows driving Berkshire Hathaway

The concept Buffett and Munger are pursuing with Berkshire Hathaway is simple: The star investors seek out and invest in or buy out well-managed companies with a strong business model, competitive advantages, and high cash flows that are underperforming on the stock market. As a result, Berkshire Hathaway also has solid, positive cash flow, which is normally used for new investments in other companies with the characteristics described – and so on. According to “Aktienwelt360”, this results in a “process of value creation and inner value increase” that can be continued indefinitely. Overall, the interplay of a good approach, positive cash flows, and a timeless business model justify Berkshire Hathaway’s classification as a perpetual motion machine, according to the financial website.

While this business model could possibly be perpetuum mobile for investors, after all they passively receive more returns through the increase in value of their investment, Buffett and Munger put effort and energy into maintaining it. So things aren’t going to happen by themselves at Berkshire Hathaway either. However, the star investors have been pursuing this strategy undeterred for decades and have helped the holding company to achieve success and an excellent reputation. But several factors could throw Berkshire’s perpetual motion machine out of sync — and in some cases have done so in the past.

These factors could bring the perpetual motion machine to a standstill

“In the end, the recipe for success is pretty simple: build up cash flow streams, get cash flow, and invest again,” writes “Aktienwelt360” about Berkshire Hathaway’s strategy. However, the past has shown that this is not so easy after all. Investing isn’t always possible, as both Warren Buffett and Charlie Munger have repeatedly pointed out. Because sometimes there is simply no potential investment that meets your criteria. As a result, cash holdings in the hundreds of billions piled up at times at the investment holding company. In order to nevertheless generate returns for investors, Berkshire also regularly resorts to share buybacks. However, this does not generate any new cash flows, which, as described above, are actually necessary for the maintenance of perpetuum mobile at Berkshire.

According to “Aktienwelt 360”, another problem arises from the sheer size of Berkshire Hathaway. Because the investment company, with a market capitalization of currently 686.48 billion US dollars, is now so large that small and medium-sized takeovers or acquisitions are hardly significant (as of the closing price on March 8, 2023). Even the takeover of the insurance group Alleghany for around 11.6 billion US dollars in early 2022 – one of the largest Berkshire deals in recent years – is likely to have been just a drop in the bucket. According to the financial website, the average return for Berkshire shareholders has already declined in recent years due to a lack of major acquisitions, so the perpetuum mobile is slowing down.

For Warren Buffett and Charlie Munger, investing in strong but undervalued companies is particularly important. If this is not possible, they prefer not to invest at all. This makes you one of the best-known representatives of value investing. However, both investors are more than 90 years old — so they won’t be at the helm of Berkshire Hathaway forever. Greg Abel, who is currently a member of the Berkshire board of directors, has already been selected as Buffett’s successor. Should the latter change the previous investment approach of the holding company and, for example, give preference to more growth stocks, this could, in the worst case, bring the perpetuum mobile to a complete standstill. Abel was “really innovative in his thinking and business approach,” Buffett said of the businessman back in 2013. So it’s quite possible that a change at the top of the company will also be accompanied by a change in strategy – and investors will then have to look for another perpetuum mobile from the stock universe for secure returns.

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– on my own behalf –

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