A:

Berkshire Hathaway ranks among the most valuable companies in the United States, alongside such names as Google, Microsoft and Exxon Mobil. It has consistently outperformed the S&P 500 over the course of four decades and reported record profits of $19.5 billion in 2013. Despite its unprecedented success, there are both practical and theoretical reasons to believe that the size of the pseudo-hedge fund will eventually limit its relative profitability.

The future returns of Berkshire Hathaway – Warren Buffett's Omaha-based holding conglomerate – are dependent on a huge number of variables. Buffett will not be CEO forever, which means that the company will have to properly execute a transition to new management. Even then, Berkshire Hathaway has long had a famously light-handed approach towards managing its subsidiaries. The company's enormous portfolio includes ownership in more than six dozen other firms, eight of which would be Fortune 500 companies on their own. Each one faces different management decisions and economic factors that affect returns.

Business finance and economic theorists have long believed that firms can grow too large and that small firms outperform large firms. Eventually, transaction costs rise as trading arrangements grow more complicated and management structures become more layered. Additionally, the same monetary calculation problems that render socialism ineffective will eventually place an upper bound on the size of a firm. Additionally, profits will attract competitors who push margins closer to equilibrium.

Berkshire Hathaway has largely been able to escape the limits of economies of scale by simply purchasing additional companies that meet Buffett's criteria to fuel new profits. When one company slows down, another picks up the slack. It could prove very difficult to find enough new businesses to generate high returns as Berkshire's market cap continues to expand. It seems safe to say that there is a tipping point at which huge returns are unlikely, but defining when Berkshire Hathaway will reach that point is much more difficult.

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