‘Growth Eventually Dampens Exceptional Economics’-akbannernews

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2025-09-21

‘Growth Eventually Dampens Exceptional Economics’

Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B) (BRK.A) , has long been admired for his ability to capture complex economic truths in simple, memorable language. One of his most pointed insights is his assertion that “an iron law of business is that growth eventually dampens exceptional economics.” This message first appeared in his 1985 shareholder letter, but it’s something he has repeatedly reiterated over the past several decades. Most recently, during the 2025 annual shareholder meeting, he reiterated his concerns on the same issue.

During the Oracle of Omaha’s final shareholder meeting, he said ‘It’s too bad that Berkshire has gotten as big as it is because we love that position and I’d like it to be a lot larger than it is.” Continuing along this line, he explained, “We’ve got in the range of $20 billion invested, and I’d rather have $100 billion than $20 billion. Size is an enemy of performance at Berkshire, and I don’t see any good way to solve that problem.”

Those comments were in reference to a sizeable position they’ve built in Japanese trading conglomerates. The trading houses resemble Berkshire Hathaway in their structure, but own substantial stakes in many of the biggest names in Japanese technology and manufacturing. But the issue is, while $20 billion is massive for nearly every entity on the planet, it’s a drop in the bucket for Berkshire. For a company worth $1 trillion, that’s only about 2% of their company.

This issue shows how Berkshire is increasingly limited by their size. They’re trying to find companies with meaningful upside, at good valuations, and where they can spend tens of billions without becoming a majority shareholder. The number of target companies where this is possible is very small. The number of companies that fit Berkshire Hathaway’s investing thesis is even fewer. Those that meet both of these criteria and can be purchased at a valuation fitting for Berkshire? These opportunities are what Berkshire aims for, but they typically only come around due to specific events. For example, Berkshire recently purchased a substantial position in United Healthcare (UNH) due to their stock dropping from ongoing controversy.

The remark reflects a principle that applies across industries and eras: businesses that generate extraordinary returns in their early stages often find it increasingly difficult to sustain those levels as they expand. High returns attract competition, markets become saturated, and the opportunities to reinvest profits at similarly favorable rates decline. Buffett’s phrasing underscores the inevitability of this process — growth, while often celebrated, can erode the very advantages that made a business special in the first place. Ironically, despite his initial warning some 40 years ago, Berkshire has managed to still perform incredibly well, despite its growing size.

The context for this observation comes from Buffett’s own experience managing Berkshire Hathaway. Over the decades, the company has grown from a struggling textile manufacturer into one of the largest conglomerates in the world. In the process, Buffett has seen firsthand how scale limits the ability to replicate extraordinary past performance. With larger amounts of capital to deploy, only the biggest investment opportunities can move the needle, and those are far rarer. His candid acknowledgment of these constraints reflects the pragmatic mindset that has defined his career.

Buffett’s authority on the subject stems from more than half a century of investment results that have consistently outpaced market averages. His reputation as the “Oracle of Omaha” is not simply based on performance but also on the clarity with which he communicates enduring business lessons. Investors and executives alike pay attention because his record demonstrates that he has successfully navigated the very challenges he describes.

The statement also resonates with broader economic history. Many once high-flying companies—whether in technology, consumer goods, or finance — have seen growth rates slow and returns normalize as their markets matured. Even businesses with powerful competitive advantages face limits when expansion requires ever-greater amounts of capital or when marginal opportunities deliver weaker returns than the initial core operations.

In timeless terms, the quote remains relevant to current markets. Companies in fast-growing sectors such as artificial intelligence, renewable energy, and digital platforms often promise extraordinary growth and profitability. Yet Buffett’s warning serves as a reminder that scaling such operations will eventually introduce pressures that diminish their exceptional economics. For investors, it is a caution against assuming that early returns can continue indefinitely. For managers, it is a call to focus not just on growth, but on preserving quality and efficiency as size increases.

Buffett’s insight is neither pessimistic nor dismissive of growth. Rather, it recognizes growth as a double-edged sword—capable of creating opportunity but also of straining a company’s economic engine. His words highlight the discipline required to allocate capital wisely, even in successful enterprises.

In a business world often focused on expansion at all costs, Buffett’s reminder that growth inevitably tempers exceptional performance remains a guiding principle for long-term thinking.

On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com