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Profit Growth Hopes a 'Dream,' Buffett Says

Investing: The billionaire investor tells Berkshire Hathaway shareholders to reign in unreal expectations.

April 30, 2001|From Reuters

OMAHA, Neb. — Warren Buffett told his followers over the weekend to scale back unreal expectations of his firm Berkshire Hathaway Inc., as the billionaire investor warned that corporate America's hopes for profit growth, and investors' assumptions of returns, were entering a "dream world."

"The probability of us achieving 15% growth in earnings over an extended period of years is so close to zero it's not worth calculating," said Buffett, known as the "Oracle of Omaha" to the 5,000-or-so Berkshire shareholders packed into his home town's Civic Auditorium for the firm's annual meeting Saturday.

"And nor do we think any large company in the United States is likely to [post such growth]," said Buffett, reckoning that only two or three Fortune 500 companies might be able to hit 15% profit growth consistently over a long period.

Investors, pumped up by advisors after a decade-long bull market, and led on by grand promises from companies, now have unreal expectations of returns, warned the 70-year-old Buffett, who has built up his $100-billion Berkshire by slowly patching together old-line businesses and making canny stock investments.

"Fifteen percent [return on stock investments] is a dream world," warned Buffett.

"It's simply crazy to have such very high expectations," added Charlie Munger, 77, Buffett's partner at Berkshire, and respected investment sage in his own right. "Years ago 15% return was regarded as impossible, now they say 'so what'. "

A return of 6% a year was more realistic, the pair warned, rather than the 9% or more that pension fund managers now promise.

For Buffett, that means a natural slowing in the phenomenal growth of his combined insurance firm, holding company and investment vehicle that has made thousands of shareholders millionaires and made him an investing legend.

Since 1965, when Buffett bought a small textile mill called Berkshire Hathaway to use as the base for his investments, the book value of its shares has increased about 24% per year--twice the rate of growth of the S&P 500.

In that time, Berkshire's stock price has risen from $12 in 1965 to $67,005 a share at the close of the New York Stock Exchange on Friday, making Buffett one of the most revered and emulated investors.

The problem for Berkshire now, Buffett said, is finding enough firms to buy to keep growing.

"The bigger you are, the fewer opportunities there are," said Buffett, who is now looking for a major acquisition. "What we'd really like is a $10- or $15-billion acquisition," he said, but warned that finding good deals that size was not easy.

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