I wrote an article back in November (when Berkshire Hathaway (NYSE:BRK.A)(BRK.B) was trading in the mid-$80’s per share) that took a close look at the portion of the company’s value that was dependent upon the future decisions of the Oracle of Omaha. For those who didn’t have a chance to read it (here), the last paragraph offers a quick summary of my conclusion:
“Collectively, the 'permanent' equity holdings, the wholly-owned businesses, and the potential impact of a share repurchase, all amplify Warren’s impact on the long term success of the company – and as a corollary, diminish the impact of any new leader. Whoever takes the helm at Berkshire Hathaway will no doubt be important in allocating the billions in capital that flow through the company’s operating businesses and equity holdings over the coming years, an importance that only increases with time as new investments collectively become material; however, as we look at the starting line, much of what appears to be under their control is really locked up in securities and businesses selected over the past few decades – interests that will go unchanged regardless of how long Warren stays on as the CEO of Berkshire Hathaway.”
While that article addressed many of the pertinent quantitative factors, it was incomplete in addressing the qualitative factors – namely, how will the people of Berkshire Hathaway respond to life without Warren?
There’s a great book by Robert Miles entitled “The Warren Buffett CEO” that addresses this concern; one particular quote in the book, from Tony Nicely, the CEO of GEICO, offers an interesting assessment of Berkshire’s future prospects:
“I think most people who work for Berkshire do it because they love their work, not because of anything else. I would certainly put myself in this category... Even after Warren, Berkshire will probably be very similar to the way it is right now. The method Warren uses is a wonderful one, and my guess is that his replacement will follow the same method, or a similar one. No doubt there will be a change in the price of a share the day that Warren passes on, but it’s not going to truly change the value of Berkshire. Berkshire will continue to be a good investment.”
When Tony discusses “the method,” I think I know what he’s talking about; here is how Charlie Munger has described it on a few instances:
"It's a good question. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It's not difficult, but it looks difficult because it's unconventional -- it isn't the way things are normally done. We have low overhead, don't have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than average. It's simple and common sense.”
Another time, when asked about life after the Warren and himself, Charlie simply said:
“Berkshire will be very successful long after we’ve gone. It has wonderful businesses and a durable culture.”
I think the two key points from this commentary comes back to management and culture. Berkshire is famously known for being decentralized (as Charlie says, “almost to the point of abdication”). People like Tony Nicely, Ajit Jain, and Matt Rose are well beyond financial security; they continue to run the businesses they love because they are left to work on their own paintings, as Warren’s been left to paint his without the imprint of outsiders. Berkshire has been built this way by design; this model is undoubtedly the best approach for its continuing success after Warren and Charlie are no longer with us.
Backing out that characteristic of Berkshire’s operating structure from the culture is an act of futility; in regards to wholly owned businesses, I think this is the single most important factor for consideration. When it comes to managing the float of the insurance operations and other equity positions, Berkshire’s shareholder base has clear expectations that are perfectly aligned with the company’s long term focus (there aren’t many companies that have owners that consider their length of ownership a point of personal pride; Berkshire fans certainly are different than most). Todd and Ted have already started moving sizable sums for the company in this manner: for example, the recently acquired 14% stake in DaVita (DVA), with a market value approaching $2 billion (by the way, just to put that number in perspective, this position is worth considerably more than Warren’s original purchase of Coca-Cola (KO) common stock in the late 1980’s).
Part of the allure of Berkshire Hathaway to the weekend investor is the face of the company, Warren Buffett; losing one of the most successful investors in recent times isn’t an outcome anyone hopes for, but it is undoubtedly coming at some point. With that said, the collection of competitively advantaged business – both wholly owned and public traded entities – that underlie this corporate juggernaut are truly one of a kind, along with the individuals that run them. Berkshire has a bright future, with a culture that will endure; Warren’s painting is far from complete.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.