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What Happens When Warren Leaves? (BRK.A)
Warren Buffett, the "Oracle of Omaha", is openly pondering his retirement.
This past week, Buffett inserted what amounts to a "help wanted ad" in his annual letter to Berkshire Hathaway (BRK.A) shareholders.
Specifically, Buffett (who is 76 years old), is looking for a (significantly) younger man or woman with the potential to manage Berkshire's vast holdings as his chief investment officer.
He's also looking for a chief executive officer who would manage the day-to-day aspects of the business.
This is huge, because Buffett has generated mind boggling returns for investors for many years.
And investors are rightfully concerned that the heir to the Berkshire Hathaway throne may not be able to adequately fill his shoes.
But will Buffett's ultimate separation from the company be detrimental for shareholders?
Yes and no.
On the one hand, I'm confident that a chief executive would be named upon Buffett's departure in relatively short order.
After all, Buffett has openly said that Berkshire's board has identified three internal candidates, all of whom could theoretically take the helm if he were forced to leave the company for health reasons.
But it's the chief investment officer position I'm a little worried about. After all, Buffett is a unique character. He draws a modest $100,000 a year salary, and no bonus. In all sincerity, it is going to be hard to find an investment manager in this day and age that would be willing to work for that salary, and be charged with the enormous task of taking over for perhaps the greatest investor of all time.
Not to mention that the individual would be responsible for managing and possibly deploying the company's roughly $40 billion in cash, and keeping a close eye on the roughly 60 companies it currently owns under its vast umbrella. Again, it's a tall order, and the compensation factor doesn't help.
Now some have pointed out that perhaps Lou Simpson, who manages Geico's investment portfolio, and who has a reputation as a shrewd manager, could be the solution. But Simpson is 70 years old, so he would be only be a temporary replacement.
Another concern I have is replicating Buffett's mindset. The fact is that I (and many others on Wall Street) have read a lot of the same books that Buffett has read on investing, such as "Security Analysis" and "The Intelligent Investor".
But the fact is that despite reading these books, obtaining advanced degrees and living through several market cycles (from peak to trough), very few on Wall Street have been able to obtain his investment results year in and year out. This will make the job search that much harder.
But even beyond performance results, Buffett has an instinctual knack not just for crunching numbers but for seeing a solution or a trend, sometimes years before the crowd. He is also an unusually patient investor who is willing to wait years for his investments to bear fruit. Today's generation of investors (and again this includes myself) simply lack those skills.
To be clear, I am relatively certain that Buffett's search will be fruitful (after all he has a knack for finding solid talent). But I just can't see how the new hire will ultimately be able to live up to Buffett's, or shareholder's expectations.
So how will this all shake out?
My assumption is that over the next few years, Buffett will announce the new hires. I also suspect that upon the announcement that he will step down (and then act as a consultant) while the replacements get their feet wet.
But once they are forced to go it alone, without Buffett's or Charlie Munger's (Buffett's long time confidant and vice chairman of the board) consult, I suspect that the company's performance and shareholder confidence may very well begin to wane.
If nothing else, I think that the allure of owning Berkshire Hathaway's stock will be gone, and that a good number of investors that have held the shares for years (again because of Buffett's investing acumen and stellar reputation) will probably bail.
The Bottom Line
Buffett has done an unbelievable job growing Berkshire from a mom and pop shop to a corporate behemoth with almost $250 billion in total assets. But I have trouble believing that anyone will ever be able to fill his larger than life shoes.
This past week, Buffett inserted what amounts to a "help wanted ad" in his annual letter to Berkshire Hathaway (BRK.A) shareholders.
Specifically, Buffett (who is 76 years old), is looking for a (significantly) younger man or woman with the potential to manage Berkshire's vast holdings as his chief investment officer.
He's also looking for a chief executive officer who would manage the day-to-day aspects of the business.
This is huge, because Buffett has generated mind boggling returns for investors for many years.
And investors are rightfully concerned that the heir to the Berkshire Hathaway throne may not be able to adequately fill his shoes.
But will Buffett's ultimate separation from the company be detrimental for shareholders?
Yes and no.
On the one hand, I'm confident that a chief executive would be named upon Buffett's departure in relatively short order.
After all, Buffett has openly said that Berkshire's board has identified three internal candidates, all of whom could theoretically take the helm if he were forced to leave the company for health reasons.
Not to mention that the individual would be responsible for managing and possibly deploying the company's roughly $40 billion in cash, and keeping a close eye on the roughly 60 companies it currently owns under its vast umbrella. Again, it's a tall order, and the compensation factor doesn't help.
Now some have pointed out that perhaps Lou Simpson, who manages Geico's investment portfolio, and who has a reputation as a shrewd manager, could be the solution. But Simpson is 70 years old, so he would be only be a temporary replacement.
Another concern I have is replicating Buffett's mindset. The fact is that I (and many others on Wall Street) have read a lot of the same books that Buffett has read on investing, such as "Security Analysis" and "The Intelligent Investor".
But the fact is that despite reading these books, obtaining advanced degrees and living through several market cycles (from peak to trough), very few on Wall Street have been able to obtain his investment results year in and year out. This will make the job search that much harder.
But even beyond performance results, Buffett has an instinctual knack not just for crunching numbers but for seeing a solution or a trend, sometimes years before the crowd. He is also an unusually patient investor who is willing to wait years for his investments to bear fruit. Today's generation of investors (and again this includes myself) simply lack those skills.
To be clear, I am relatively certain that Buffett's search will be fruitful (after all he has a knack for finding solid talent). But I just can't see how the new hire will ultimately be able to live up to Buffett's, or shareholder's expectations.
So how will this all shake out?
My assumption is that over the next few years, Buffett will announce the new hires. I also suspect that upon the announcement that he will step down (and then act as a consultant) while the replacements get their feet wet.
But once they are forced to go it alone, without Buffett's or Charlie Munger's (Buffett's long time confidant and vice chairman of the board) consult, I suspect that the company's performance and shareholder confidence may very well begin to wane.
If nothing else, I think that the allure of owning Berkshire Hathaway's stock will be gone, and that a good number of investors that have held the shares for years (again because of Buffett's investing acumen and stellar reputation) will probably bail.
The Bottom Line
Buffett has done an unbelievable job growing Berkshire from a mom and pop shop to a corporate behemoth with almost $250 billion in total assets. But I have trouble believing that anyone will ever be able to fill his larger than life shoes.
by
Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
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