Berkshire Hathaway's Achilles' Heel

Jul.15.13 | About: Berkshire Hathaway (BRK.A)

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is truly an amazing company. Very few investments have returned more than a million percent in a lifetime (Buffett took over in 1965 when the share price was around $18 USD, and the share price is now a stone's throw away from $180,000 USD).

It is likely that Berkshire will continue to reward investors with good investment returns for several years, since it continues to operate efficiently and to negotiate good deals [like the recent Heinz (HNZ) transaction]. However, there is a key factor that could impact Berkshire's future. Like most seemingly invincible giants, Berkshire has an Achilles' heel. So far it has not really had much of a negative impact, but it could prove catastrophic in the future. This fatal flaw is Berkshire Hathaway's very limited understanding of technology.

For decades, technology companies and traditional businesses played in different sand boxes, with little spill between them. This made sudden disruption of traditional businesses very rare. Peter Lynch described in one of his books how, if you invested in a successful hotel chain, it was basically impossible to wake up and find your business disrupted overnight. The thinking was that it would take many years to build a big competing hotel chain, so you would have ample time to evaluate the threat. With the increasing penetration of technology into other sectors that is no longer true, as hotels recently found out. They suddenly discovered they now have to compete for guests with AirBnb, HomeAway (NASDAQ:AWAY), and other Internet startups.

The following is a small list I compiled of some of Berkshire's subsidiaries and stock investments, and some of the potential disruptors they might face in the future. Some might have an impact in the short to medium term, others longer term:

Berkshire Investment/Subsidiary

Possible disruptor(s)


Hyperloops, unmanned aircraft




Solazyme (SZYM)

Wells Fargo (NYSE:WFC)

Bank of Internet (NASDAQ:BOFI), LendingClub

American Express (NYSE:AXP), Visa (NYSE:V), MasterCard (NYSE:MA)

Paypal (NASDAQ:EBAY), Dwolla, Square

DirectTV (DTV)

Netflix (NASDAQ:NFLX), YouTube (NASDAQ:GOOG), Aereo


Google's self-driving cars


Stratasys (NASDAQ:SSYS)

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Table investments/subs vs. possible disruptors

In a world of self-driving cars Geico will be forced to reinvent itself, theft insurance will probably still be necessary, but car accidents should significantly trend down. They are not that far off, meet the first user:

Another technology that is more advanced than most people realize is 3D printing. Iscar, being a metal working tool company will start facing increasing competition from this manufacturing approach as the 3D companies start offering more advanced metal printers.

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Slide from a recent Stratasys investor presentation

Even utilities, which are thought of as very safe investments, are at risk of disruption in the future. If Swanson's law (which states that solar prices decline 20% for every doubling of capacity), continues for at least a few more years, distributed energy generation will accelerate significantly, and this would be to the detriment of utilities like MidAmerican. One of the companies growing very fast in the distributed energy business is SolarCity. To its credit, MidAmerican has been one of the most forward looking utilities making significant investments in solar farms.

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Slide from a recent SolarCity investor presentation


Marc Andreessen is right, software is in the process of eating the world. Technology will continue to disrupt new business sectors, and this poses a real risk to companies that specialize in traditional areas and don't have a deep knowledge on advanced technology.

It is my belief that Buffett has become increasingly aware of this risk, as evidenced by the answer he provided to a question on what he would do differently if he were just starting to invest in this day and age. His answer was that he would try to understand technology better, and increase his circle of competence in that direction. I hope Ted Weschler and Todd Combs are paying close attention to this risk, since they will be directing the future investment dollars at Berkshire.

Disclosure: I am long BRK.B, SZYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.