MR. WARREN BUFFETT – A RAINBOW OF ROLE MODELS {WEDNESDAY SERIES}
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LIFE AFTER WARREN BUFFETT – A RAINBOW OF ROLE MODELS {WEDNESDAY SERIES}
Warren Buffett first bought Berkshire Hathaway stock nearly 61 years ago. Unhappy with management, the 34-year-old took control of the ailing textiles maker 2-1/2 years later and would come to almost rue the decision. Two decades of failed turnaround efforts ended with Berk- shire’s (BRKB) exit from the dying textiles trade. But it was just the start for one of the stock market’s most storied personalities.
On Wednesday, Buffett turned 93, and he’s still piloting the company. Out of the ashes of what he called that “terrible business about which I knew very little,” Buffett has built one of America’s most iconic conglomerates, with a market value surpassing $820 billion.
A highly decentralized conglomerate, Berkshire controls and owns all or major portions of BNSF Railway and its insurance flagship Geico, along with Pilot travel centers, Borsheim’s jewelry chain, Dairy Queen and Pampered Chef.
Those efforts have won Buffett legions of fans, including Bill Smead, a longtime Berkshire shareholder. Smead Capital first bought Berkshire shares in 2003, by which time the company had already made major acquisitions in insurance and energy. And Bill Smead has watched, somewhat astonished, the exponential growth of both its scale of operations and share value since then.
“You don’t think something that successful will stay successful that long and get as big as Berkshire has become,” said Smead, chief investment officer at Phoenix-based Smead Capital Management.
Buffett’s Vast Empire Faces A New Era Of Scrutiny
But the conglomerate faces big questions about its future. With Buffett in his 10th decade, and his second-in-command and Berkshire co-Chairman Charles Munger set to turn 100 on Jan. 1, restlessness is growing in the shareholding ranks. Both analysts and investors have called for more transparency and disclosures, including on the important issue of succession.
It’s easy to see why. Buffett is far more than the CEO of Berkshire Hathaway. He is arguably America’s most famous, beloved, and trusted investor.
Likewise, Berkshire Hathaway isn’t just one of the ten largest S&P 500 companies by market capitalization. It is also the largest shareholder of eight S&P 500 giants, including Bank of America (BAC), Coca-Cola (KO), and Occidental Petroleum (OXY). Further, it’s one of the three biggest institutional owners of Apple (AAPL).
Retirements Ride On Berkshire
That market influence means the fortunes of most Americans’ nest eggs for retirement are tied in some way to those of Buffett’s Berkshire.
For Berkshire shareholders, the loss of Buffett could mean a sharp pullback in the stock, or at least that’s what some analysts say.
For future management, the eventual loss of Buffett and Munger could bring unaccustomed scrutiny and pressure on a broad range of issues.
Calls for a breakup are sure to rise, as well as debate on matters from corporate governance to the elusive — that is, nonexistent — Berkshire Hathaway stock dividend.
All that looms in the future. Right now, the investment community would like to see the traditionally tight-lipped company loosen up more about its plans for the future.
“Berkshire would do itself a favor to more strenuously and more directly reassure investors what the process will be like after Buffett,” said CFRA analyst Catherine Seifert.
Berkshire’s Two-Man Moat
Warren Buffett shows few signs of slowing down. The conglomerate he has built up over seven decades is cruising. It’s a vehicle boosted by strong earnings and a massive cash pile that has ballooned to nearly $150 billion.
In the second quarter, Berkshire Hathaway’s resilient earnings added to its cash hoard, and showed the value of its fortress-like diversified business mix, says Bill Stone, chief investment officer at Glenview Trust.
But along with the company’s mountain of cash, Buffett and Munger are perhaps the moat.
Stone, a long-term shareholder, regards their inevitable exit with a degree of fear. “When they go, you are losing your best players ever, so you can never feel good about that,” he told IBD.
But Stone appreciates that Berk- shire has begun to lift the lid on its post-Buffett plans. Those plans call for Buffett’s roles of chairman, chief executive and brain behind the stock portfolio to be divided.
Some investors would like to see the conglomerate broken up into pieces as well.
Others disagree. With the right person at the top, there are “real positives” to its structure, Stone said. Smead echoed those sentiments.
The Succession Plan
In 2021, Buffett confirmed that Greg Abel, who oversees Berk- shire’s noninsurance business, is his designated heir, putting to rest years of speculation.
As CEO, Abel will oversee day-to-day operations and allocate capital among dozens of businesses across far-ranging industries: from energy and utilities to insurance, railroads, manufacturing, services, and retail.
Berkshire Hathaway also passively owns businesses through its substantial stakes in publicly traded companies.
For more than a decade, Buffett has overseen the stock portfolio along with Todd Combs and Ted
Weschler. Analysts who spoke to IBD expect both to remain as in- vestment managers after Buffett, though who will become stock- picker-in-chief is less clear.
They also expect Ajit Jain, who oversees the insurance and reinsurance businesses, to stay on in that role. In the three years leading up to 2021, Jain was seen as a po- tential successor to Buffett along- side Abel. Insurance is Berkshire Hathaway’s biggest business by revenue.
Of late, Buffett has introduced the men in line to succeed him on the public stage. He affirmed in May that Abel is the right man for the job.
Still, a degree of mystery remains. Analyst Meyer Shields at KBW said “there’s not that much we know about (Abel).”
Buffett’s Investment Strategy
The Buffett investment strategy is simple: focus on finding and buying quality businesses at reasonable prices. Investors prize what he has delivered: a motley collection of companies with durable competitive advantages.
Buffett’s success isn’t happenstance. Stone ties it to an “amazingly intelligent” way of structuring the company. In part, Berkshire uses its growing insurance “float” to invest in the business.
From 1965 to 2022, Berkshire Hathaway stock delivered a compound annual return of 19.8% vs. a 9.9% gain for the S&P 500, the company says.
Since the fall of 2008, Berkshire has not outperformed the S&P. Yet Buffett’s record, tenure and reputation remain widely admired.
Some names play in the same league: George Soros, Stanley Druckenmiller, Jack Welch and Harry Singleton were mentioned during interviews for this story. But even those hedge fund tycoons and former corporate CEOs fall short in breadth of expertise, according to Buffett watchers who spoke to IBD.
Stone says he’s “more trusting” of Buffett and Munger than anybody else. That’s in part because Buffett has said 98% of his own net worth — an estimated $118.3 billion now — lies in Berkshire Hathaway stock.
That deep trust could prove a hurdle for Buffett’s successors.
Analyst Stephen Biggar at Argus Research says those in the line of succession have won over the Berkshire chief. Next, they will have to prove themselves to investors.
If analysts have a bone to pick with Buffett, it’s regarding his coyness. There’s no investor relations team at Berkshire Hathaway. Analysts say they don’t get invited to annual shareholder meetings. And the company doesn’t hold earnings calls, so opinions are based — in Seifert’s phrase — on a mosaic theory of pieced-together details.
Change Can Be Good
Analyst Jim Shanahan of Edward Jones would welcome certain changes at the top.
“I’m hopeful Greg Abel will feel differently about engaging with analysts and the investor community,” he said.
Regardless, loyalty runs deep. Many hitched their wagon to the company “believing that Warren was unique and the returns he has been able to achieve over time are also unique,” Shanahan said.
The analyst said it might initially seem many of these Buffett fans would sell without the legend around. But his talks with them, their heirs and estates suggest otherwise.
“I’ve come to appreciate that many of them have become more comfortable with the sustainable qualities of the model,” he said. “And especially given basis considerations and other factors, they are more likely to stay invested.”
In case of a sharp, post-Buffett sell-off, Stone believes the board would “just step in and buy back shares” if prices fell below a perceived threshold of value.
Immediately or soon after Warren Buffett’s exit, calls to break up the company are almost certain.
A divided Berkshire Hathaway would boost shareholder value, some say, while making the com- pany simpler and easier to follow.
It’s a polarizing topic. Biggar, at Argus Research, sees little chance of a Berkshire breakup. He finds most shareholders like the con- glomeration strategy.
Indeed, longtime shareholder Smead argued that Berkshire’s “wonderful format” gives both its operating companies and its stock-pickers “great freedom” to make the decisions they think best for the business.
KBW analyst Shields, on the other hand, views Berkshire’s size as an impediment to growth.
Buffett himself regards Berk- shire’s businesses as stronger to- together, but accepts that pressure to split up will begin the moment he’s gone.
“If I died tonight, I think the stock would go up tomorrow,” Buffett said during Berkshire’s 2017 annual meeting. “And there’d be speculation about breakups and all that sort of thing.”
Greg Abel, Heir Apparent
What sort of character might the new Berkshire have after Buffett? Seifert said she expects CEO Abel to surround himself with the kind of low-key, hardworking managers that the company is known for. She sees the Buffett standards — “there’s no corporate jet, there’s no banker culture” — persisting.
But Shanahan foresees the company’s famous annual shareholder meetings becoming “more businesslike” and less folksy. Abel, Buffett’s designated successor, is “smart and analytical” but can also seem “cold and disconnected,” he said. He doesn’t project the grand-fatherly Buffett image that investors relate to.
Abel, 61, trained as an accountant before he tracked Berkshire’s entry to the energy business. Berkshire took a controlling interest in Mid-American Energy shortly after its 1999 merger with CalEnergy. Abel took over as MidAmerican’s CEO in 2008.
Abel’s position at Berkshire expanded in 2018 to include all non-insurance operations.
Current Businesses In Hand
Analysts say Abel is a telling choice as CEO. Amid the nation’s energy transition, Berkshire has expanded in both fossil fuels and renewable energy, especially through its growing investment in Occidental Petroleum. Its stake is already north of 25%.
Those investments have come despite Buffett and Munger’s increasing leeriness of the stock markets. In the first half of 2023, Berkshire sold $18.4 billion more in stocks than it bought.
Always a pragmatist, Buffett is betting that the transition to renewable energy will ultimately make the remaining supply of fossil fuels more valuable. At the same time, renewables provide valuable tax credits for the company.
Abel is, no doubt, setting the direction. But his views are less clear on some more controversial subjects, like nuclear energy.
KBW’s Shields suggested something on that score may be inferred from the company’s “openness” to considering the social and financial implications of less reliance on oil and gas.
Abel has also loaded up on Berk- shire Hathaway shares with his own money after what some people saw as nudging from Buffett. A $24.6 million purchase in March took his A shareholdings to about $105 million. That’s “important to recognize,” Shanahan said.
Future Management Team
When Abel eventually gets bumped up, that promotion will open up the top slot at Berkshire Hathaway Energy. It’s one that could be filled by Occidental Petroleum CEO Vicki Hollub, analysts say.
Similarly, on Berkshire’s insurance side, the possible exit of Jain, 72, could create an opening well suited to Joe Brandon, they add. Brandon is the current CEO of Alleghany Property and Casualty Insurance, which Berkshire acquired in 2022.
Further down the organizational chain, at subsidiary companies, the talent roster is more uncertain. CFRA’s Seifert says Berk- shire ought to address that concern straight away.
The company’s reticence about succession is especially pronounced on the equity side.
Warren Buffett has long been the keeper of Berkshire’s stock investment portfolio. Stock picking, “the special sauce at Berkshire Hathaway,” could be the role that is hardest for Buffett to give up, Seifert says.
Combs or Weschler, Buffett’s in- vesting deputies, are believed to have bought Apple, for example. The Megatech leader now accounts for more than half (51%) of Berk- shire’s massive stock portfolio.
The pair are also suspected of moving Berkshire into Amazon (AMZN), as well as tech IPOs Snow-flake (SNOW) and StoneCo (STNE). These three stocks combined make up less than 1% of the Berkshire Hathaway portfolio.
But no one knows for sure. And Buffett, who insists “Charlie and I are not stock-pickers; we are business-pickers,” isn’t telling.
Risks In The Stock Portfolio
Due to the hefty Apple stake, some Buffett watchers warn of concentration risk. Others are surprised that the value investing legend has built up such a massive position in one of the most hotly pursued stocks in the marketplace.
For Shanahan, those changes have transformed how he views Berkshire Hathaway itself. “The investment portfolio feels more new economy,” he said, “and complements the core operating companies, which are old economy.”
There’s disappointment, too, for some. That particularly relates to scant details about Combs and Weschler, who manage growing slices of the $353.4 billion portfolio.
From Smead’s perspective, Buffett has explained his own investment discipline as clearly as anyone has ever managed to do so.
So, he asked: “Why are we not al- lowed to learn about his two picked stock-pickers, especially when we know Buffett and Munger are not long for this world?”
Combs also runs Geico, which raises some concerns, in Shanah- an’s view, about bandwidth issues in the top leadership team.
‘The Warren Buffett Way’
After the reins are handed over, most analysts anticipate an explicit push for cultural continuity. Some rule out significant or even moderate changes, though they believe small changes are possible.
“These guys have been brought up in the Buffett way,” said Argus analyst Biggar. “It would be suicidal for the Berkshire stock price if they altered the strategy.”
Yet other analysts anticipate internal friction, executive turnover, committee-like decision making. They caution that managers, like many shareholders, may be more loyal to Buffett than to Berkshire.
In contrast to most major companies, Berkshire Hathaway enjoys what Seifert sees as a rather “benign” and “passive” investor base due to the regard for its chief executive. And while Buffett loves stocks that pay dividends, he has famously avoided paying one.
Under new management after Buffett, she said, it’s likely to see a push for a dividend and regular return of capital to shareholders.
Warren Buffett’s Death
At least initially, any push for change will only go so far. The dual share-class structure of Berk- shire Hathaway stock gives most of the voting power to owners of A shares. That primarily means Buffett, who mostly owns A shares and had 30.9% of the voting control as of a year ago.
That hold on power will extend beyond the grave. Buffett has been gifting away his stake to foundations, but he has said donations of Berkshire stock after his death will stretch “over a dozen years or so” to minimize disruption.
The donations may drag on, but in one increasingly important area, Berkshire may have to buck up.
While a leading S&P 500 com- pany by market value, it is lagging in terms of environmental, social and governance, or ESG, metrics, a factor Buffett has shown emphatic disregard for. That suggests a slog ahead to earn a spot on ESG scorecards like IBD’s own.
Berkshire is in 967th place on the Dow Jones ESG ranking of 2,068 publicly traded companies, with an aggregate ESG score of 47.77 out of 100 as of Aug. 24.
“A new generation of investors is going to demand this from them,” Seifert said.
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, and real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
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