Death of a Flywheel

Last week marked the passing of Charlie Munger —a pivotal figure in shaping Berkshire Hathaway into one of the most extraordinary companies of our era—at 99 years old. His legacy extends beyond his business acumen; Munger was a philosophical thinker whose insights have been compiled into a book, influencing millions. This article is an enhanced version of my previous analysis on Berkshire Hathaway and Amazon, offering deeper insights. It serves as a precursor to my review of a new edition of Munger's book that we'll publish on Thursday. —Evan 

Amazon and Berkshire Hathaway are in the midst of an identical, potentially fatal crisis: they are simply too successful. It’s new America, one of silicon and servers, versus old America, a nation of steel and Coke syrup.

Amazon is the fifth most valuable company in the world at roughly $1.5 trillion. Berkshire Hathaway is the eighth most valuable at $776 billion. They are also revenue giants, with Amazon pulling in $513 billion and Berkshire doing $234 billion in 2022. At this valuation and revenue size, there are very few opportunities available to meaningfully grow either business. While this is a wonderful problem to have, it is a crisis nonetheless. 

The two companies pursue wholly different capital allocation strategies to combat this problem. Amazon runs hundreds of experiments at once and has flailed into all sorts of large capital expenditures, from movie studios (an $8.5 billion purchase of MGM) to internet satellites ($10B in expected capital spend) to healthcare (a $3.9 billion purchase of OneMedical). Berkshire mostly does highly concentrated buyouts or public equity purchases. Its big move this year was getting majority ownership in a gas station chain ($11 billion for a stake in Pilot). 

All companies face this at some point in their existence, no matter their scale. I call it the scaled-out problem: growth plateaus for a particular business line as the marginal cost to acquire additional customers outstrips their lifetime value. Companies have to diversify their markets, their product mix, or both. If they don’t, they face a slow death by decay. 

This conundrum can manifest on the scale of yeeting $10 billion dollars into satellites, or it can be as simple as a local diner expanding into Sunday brunch. By examining this problem in its most scaled, most extreme version (Amazon and Berkshire Hathaway), there are truths revealed about investing and operating that apply to everyone.