Warren Buffett: Why Too Many Great CEOs Could Hurt Market Returns

During the 1998 Berkshire Hathaway Annual Meeting, Warren Buffett contemplates the impact if all Fortune 500 companies were run by exceptional leaders like Jack Welch. He suggests that, while each individual might excel, competition among 500 “sensational competitors” could lead to a self-neutralizing effect, driving down returns on equity due to intense rivalry.

Buffett argues that markets often reward relative, rather than absolute, intelligence, implying that moderate competition benefits investors more than an environment of uniformly high-performing managers. He humorously concludes that weak competition is advantageous and likens it to the idea of beating a chess champion like Bobby Fischer only by playing him in a different game.

Here’s an excerpt from the meeting:

Buffett: An interesting question is to think about, if you had 500 Jack Welches and they were running the Fortune — they’re cloned — and they were running all of the Fortune 500 companies, would returns on equity for American business be higher or lower than they are presently?

I mean, if you have 500 sensational competitors, they can all be rational, and they will be. They’ll be smart and keep trying to do all the right things. But there’s a self-neutralizing effect, just like having 500 expert chess players or 500 expert bridge players. You still have a lot of losers if they get together and play in a tournament.

So, it’s not at all clear that if all American management were dramatically better — leaving out the competition against foreign enterprises — that returns on equity would be a lot better. They might very well drive things down. That’s what, to some extent, can easily happen in securities markets. It’s way better to be in securities markets if you have a hundred IQ and everybody else operating has an 80, than if you have 140 and all the rest of them also have 140.

So the secret of life is weak competition, you know. (Laughter) Somebody said, “How do you beat Bobby Fischer?” You play him in any game except chess. (Laughter) That’s how you beat Jack Welch. You play him in any game except business, although he’s a very good golfer, I want to — (laughs) — point out.

He shot a 69 a few months ago when I saw him at a very tough course. Jack manages to play 70 or 80 rounds of golf a year and come in sub-par occasionally, while still doing what he does at GE. He’s a great manager. But 500 Jack Welches? I’m not at all sure that would make stocks more valuable in this country.

You can watch the entire meeting here: