Question:
I have a question on Berkshire (BRK.A, Financial)(BRK.B, Financial) which I think is your second largest position. Warren Buffett (Trades, Portfolio) now is what, 84, 85. What if he should die or get sick and can no longer manage the company? I know he has given it a lot of consideration. But how do people feel about it?
Jon Brandt:
Warren has the very unusual ability to have an instinctual way to find a deal — when he is in the bathtub call the CEO of Bank of America, or meet people ... Jorge Paulo Lemann from 3G on the board of Gillette 30 years ago, remember him and have a relationship with him so that when 3G had the idea of buying Heinz, 3G called Warren. Berkshire will always be a call for people who need capital for deals. That is not going to change. But Warren’s unique ability to find those deals — it will be hard to duplicate that. Then the final thing is the people who manage the businesses, particularly the founders who sold to him, do they have loyalty to Warren or do they have loyalty to Berkshire? I think that will be a challenge.
That said, it is not easy for Warren to put large amounts of money to work at very high rates very often. A fellow from India visited me last week. He was comparing the more recent years’ compound at Berkshire to the 50-year compound. He asked me whether I noticed that it is no longer growing at 25%, and how did I think about that? I said, ‘‘Yes, I have noticed that. It is virtually impossible.’’ But I told Bob and David, I think if Berkshire can compound its intrinsic value at 10% over the next 10 or 20 years that would be an excellent result. My point is that the expectation has already gone down so much. It is very hard for huge companies to do 15%. And it will be hard for Berkshire to do 10%, given its size. But if the board picks the right candidate for CEO — and it already has two good CIOs, chief investment officers — 10% is still a realistic if somewhat difficult or challenging hurdle.
Question:
That begs the question why is it in second position, is it safety?
Jon Brandt:
It is a couple things. I cannot speak for Bob but it is reasonably priced. It is still at a discount to its intrinsic value. I would also say that we are not having great success in finding other things to buy. What are we in terms of cash, David, these days, in Sequoia?
David Poppe:
Close to 20%. In the last 10 years Berkshire’s stock price has compounded at 10% while the S&P compounded at 8%. So Berkshire has actually outperformed by a decent amount over the past 10 years, despite its size. So you have to think of it in terms of it is still a decent holding; it is still ballast in a storm and Warren is still very, very good in a crisis at putting capital to work.
Bob Goldfarb:
I think he has done an excellent job of transforming the company or institutionalizing it with long duration assets, mainly the railroad and the utilities. I think the transaction with 3G is really driven by the operational management expertise of 3G, and that is a relationship that is going to continue for a long time. All three of these, the railroads, the utilities, and the alliance with 3G will likely consume very substantial commitments of capital. Consequently, the deployment of capital will be less of a burden for his successor than it would otherwise be. So I think there is less concern about Berkshire after Warren because of these measures that he has taken.
From Ruane, Cunniff & Goldfarb Investor Day 2015 Transcript Part II - Sequoia Fund.
