Moving the Needle

Warren Buffett’s investment approach delivered a steady compounding beast, generating over 10% return on average over the last 25 years.  His thesis focused on: “rule out companies in industries prone to rapid and continuous change”.   These tenets look to be ingrained in Greg Abel, the successor as CEO, with his announcement to buy US homebuilder Taylor Morrison.  This sector is a very trodden path inside Berkshire Hathaway, therefore a $6.8bn further commitment into the sector just further leverages the optimism for recovery in the market.  Housebuilding experiences slow changes in how we live but does suffer the cyclicality of the economic environment.  If Abel has made this call at the bottom of the cycle, then Berkshire benefits from the combined longevity of a housebuilder but the accelerated growth from a recovery.  However, this expenditure is less than 2% of the cash held on the balance sheet, growth like this is great to have but barely moves the needle.  Buffett even said this himself, “there remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by others and us”. 

Finding investment opportunities that move the needle is harder the bigger you get.  Turning $100bn into over $1trillion would have almost doubled the current value of Berkshire, this would have significantly moved the needle.  Micron has just completed this staggering feat of expansion in under a year.  There is certainly euphoria around the name but fundamentally earnings are expected to move from $9.5bn to $68.2bn in the year, over 7x larger and estimates looking for over $122bn in 2027.  Clearly this is an industry going through rapid and continuous change!  Abel has just contributed $10bn to Alphabet in their initial $80bn raise for spending on infrastructure for new AI models.  Alphabet could be considered the ‘safer’ play as it has established other businesses throwing off cash, but they do have advantage in the space not purely driven by size.  Being able to procure compute now is seen to be a leading indicator of the performance.  Alphabet can manage this given their cash position but are also able to do this from a vertically integrated standpoint, with their own TPUs powering their data centers they can compete to create Large Language Models (LLMs) on a smaller CAPEX budget than others.  Alphabet might not deliver Abel the runaway growth that Micron would have but it can position itself in the market in a cheaper and more efficient fashion than others.   As Buffett said, “It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.”  Alphabet is almost certain to be a large player in the market, unlike many other investments that could ultimately fail as the market innovates. 

The AI trade is certainly currently moving the needle of the market, through May the S&P 500 rose just over 5%, but this was driven by the Information Technology sector up 16%.  Every other sector of the market returned below 3%, and staggeringly 8 of the 10 sectors were in negative territory.  Memory has been the driver within IT though, the Roundhill Memory ETF, only launched in April, delivered 72% returns last month. Non-diversified investment into the sector would in hindsight have been the exposure to have.  This forgets though that through the first quarter of the year, Info Tech was down 13% compared to the market only down 7%.  Berkshire might not be able to move the needle as much due to its scale, though clearly opportunities still exist, but it has now diversified so that it can make returns in almost all markets.  Finding one or two stocks that return like Micron in a year is rare, having a portfolio full of them is highly improbable.  So, Greg Abel, like all investors, is attempting to find the next runaway investment, but having a solid stable of names that will provide predictable returns could be a winner in the longer term.  A thousand dollars invested in Berkshire Hathway at the start of 2000 would have been worth $10,700 at the start of 2026, the same investment in Micron would be worth $8,243. 

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