Buffett's a Genius Again

But the real problem for Buffett and Berkshire in recent years hasn't been making money on investments, but finding enough investments to put money into. Despite an active year for Buffett on the investment front, with deals like the acquisition of Internet corporate news outlet Business Wire, Berkshire Hathaway still finished the third quarter of 2006 with $42.2 billion in cash and cash equivalents. That's down only slightly from the $46 billion in cash at the end of the third quarter of 2005.

All that cash is a huge drag on Berkshire Hathaway's performance. It's hard to grow earnings by 10% when you've got $40 billion in cash sitting around earning 4%.

Blame Competition

I'd chalk up Buffett's problem in this segment of Berkshire Hathaway's business not to any diminution of his investing smarts but to too much competition from cheap money. This part of Berkshire Hathaway's business is in essence an investment pool that competes with all the other investment pools interested in buying public companies and taking them private or in providing cash to a public company for a seat on its board and a share of the profits from any turnaround.

Hedge funds and private-equity funds set a record for money raised in 2005, only to easily break it in 2006. The competition among all that money for good deals drives down the returns to investors -- something that is clearly happening right now in commercial real estate.