[dominotw]

>Because the market is finite in size

How though? How can the market stay a same size while berkshire size went from 1 billion to 100 billion. Where is 100 fold investment coming in if the market stays at a constant size. That doesn't compute. Why wouldn't the market also expand at like the investments.

[rsj_hn]

I didn't say the same size, I said finite size.

If the market grows at a rate of 6% and your company is growing at 8%, then your company will eventually slow down to 6% or else the market will speed up to 8%, but in neither situation will you "outperform" the market forever.

In the case of Buffet, Berkshire Hathaway has about $800 billion in assets under management. If the market size is 50 Trillion, and let's say that 10% of that consists of reliably undervalued companies then the size of the market for companies that Berkshire can buy is 5 Trillion. This market will grow at 6%, if you think Berkshire can have 8% returns, then it will own half of all undervalued companies in 63 years, 2/3 of all undervalued companies in 78 years, and all undervalued companies in 100 years. But of course Buffet can't find 100% of all undervalued companies and there are other people also trying to find them.

And of course each individual company that Buffet buys will itself stop making above average returns as it itself grows, and therefore every year, the returns on the companies in Buffet's own portfolio will go closer to the market average even as new undervalued companies are harder to find. Thus the overall return of Buffet's fund will be dragged down to the market return much sooner than the theoretical limits I outlined above.

[dominotw]

> I didn't say the same size, I said finite size.

Not sure how you are defining "market". How is it finite size? What is the number after which it stops growing?

> If the market grows at a rate of 6% and your company is growing at 8%

Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all. Not sure where you got your your "market size" numbers from. Did you do an actual analysis of market size growth or are you just pulling these theories out of thin air.

[rsj_hn]

> Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all.

Right because Berkshire stopped overperforming. In fact it has been underperforming the last 10 years, and Buffet was trying to explain why. https://investorplace.com/2020/10/berkshire-hathaway-stock-u...

But what what I was doing was explaining a counterfactual to show why every firm must stop outperforming. It's not just Berkshire, or 6%, 8%.

So I ran some numbers to explain to you how if A is part of B than the compound growth rare of A cannot forever be greater than the compound growth rate of B.

(Please do not reply to this comment with an argument that you are not talking about any stock called "A" and "B", just as the 6/8 seems to have tripped you up)

Berkshire is part of the market, thus it cannot outperform the market forever. In fact you expect reversion to the mean -- companies that outperform then underperform and vice versa. Why is there reversion to the mean? Because the special techniques discovered by the company are copied and disseminated, key people are poached, ideas that used to work reliably stop working, etc. So these social constraints kick in long before mathematical constraints, but even if in theory you can overcome the social constraints, you can never overcome mathematical constraints, and thus Berkshire and all other investment holding companies must eventually stop overperforming, and most only eek out a few years of net overperformance.

[dominotw]

> Berkshire is part of the market, thus it cannot outperform the market forever. In fact you expect reversion to the mean -- companies that outperform then underperform and vice versa. Why is there reversion to the mean? Because the special techniques discovered by the company are copied and disseminated, key people are poached, ideas that used to work reliably stop working, etc. So these social constraints kick in long before mathematical constraints, but even if in theory you can overcome the social constraints, you can never overcome mathematical constraints, and thus Berkshire and all other investment holding companies must eventually stop overperforming, and most only eek out a few years of net overperformance.

Understood. Thank you!

Now I wonder why brekshire investors keep holding the stock. Shouldn't the stock crash and burn. What is their logic ? Sunk cost bias?

[rsj_hn]

You are assuming that there is no such thing as a "rate" of growth. Things are either growing or not. Thus if the market is "growing" at 6%, then it's OK for a member of the market to double in size every year because both are "growing" and aren't "fixed".

Numbers matter here, you cannot have one member of the market grow at a faster rate than the market forever.

Not sure what else I can do to explain this more clearly. Try using a spreadsheet or calculator to work out some examples for yourself.