GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Berkshire Hathaway (BRK-A) Post Warren Buffett

January 18, 2009 | About:
Saj Karsan

Bill Kabourek

1 followers
The legendary investor, Warren Buffett, when asked what will happen when he is no longer at the helm of Berkshire (BRK-A) (BRK-B), always is quick to assure us that he has identified qualified successors to run the company and manage the investment portfolio. Besides, he feels fine and his doctors proclaim him in good health.

I believe Warren. He has a plan and who am I to possibly criticize the individuals that he selects as his heirs apparent? Additionally, his diet is similar to mine, lots of cheeseburgers and steaks and, best that I can tell, his exercise routine is as infrequent as mine. So, I’m not worried about Warren’s imminent demise or his designation of successor management.

Conventional wisdom has it that the Berkshire price is discounted for the eventual death of its legendary investor and leader. It also is likely discounted for the conglomerate nature of Berkshire with its many disparate parts. Despite the discounts, Berkshire has been a wonderful success story financially for its shareholders and an important instructive lesson in prudent investment techniques and business ethics. While I no longer hold a Berkshire position, I have certainly benefited from Warren’s performance, discount or no discount.

If Berkshire is such a wonderful company and it sells at a discount already that reflects the ultimate demise of Warren, then why should we be concerned about that eventual happening? The answer is found in the composition of the company’s portfolio of businesses. Fabulously successful entrepreneurs exchanged control of their companies to Berkshire for lots of cash and the ability to continue to run their baby unhindered, plus access to, and the friendship of Warren Buffett. For years the tradeoff has worked wonderfully for all concerned.

I would suspect that Buffett would suggest to his successors that they manage Berkshire as he has, both in the investment area and in the shepherding of the conglomerate companies and their managers. But will they? Strong managers tend to put their own stamp on the companies they run. They also won’t be given the benefit of the doubt, as Warren was, because of his esteemed reputation, in similar situations to Salomon Brothers and General Re. The new guy[s] will know that they won’t get any free pass and will want to keep a closer watch on subsidiaries than Warren does. That will mean more reporting and trips to Omaha for consultations. Home office staff increases and reporting responsibilities will evolve and, of course, there won’t be any phone calls or interaction with Warren. Instead there will be reporting and performance reviews.

Expectations, reporting, and performance reviews are appropriate, but if you are already a billionaire and your family is financially set are you willing to be second guessed by a mere multimillionaire CEO? Maybe the world’s richest man is worthy of asking you about your subsidiary’s latest quarterly results, but how will it sit when a new CEO inquires and has suggestions and expectations. Tension is inevitable.

The bulk of Berkshire is insurance and its invested float. That shouldn’t be impacted by my concerns about the conglomerate operating companies. But, those companies are significant and I believe there will be rapid turnover at the executive level and sub par performance under a new regime. Overall performance will be retarded as the new Berkshire management divests itself of many subsidiaries. In the meantime, Wall Street gets confused or disillusioned and the share price comes under pressure.

Without Warren, Berkshire will be under share price pressure until it slims down to an insurance holding company with significant utility and industrial concentrations. I sold my position earlier this year and while that decision looks good today, I probably sold too soon, as Warren undoubtedly remains healthy, wise, and in control for years to come. But when that time does come, his billionaire subsidiary presidents won’t like the new regime.

By Bill Kabourek

The Crusty Credit Analyst

thecrustycreditanalyst.blogspot.com

About the author:

Bill Kabourek
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

Rating: 2.4/5 (23 votes)

Comments

sandy_capone
Sandy_capone - 5 years ago
Good questions! But, I think we should give WB some credit that he has thought about these things in significant detail.
mountaincloud
Mountaincloud - 5 years ago
I bought BRK/B in Sep 2006 and sold it in Jan 2009, after holding 2 yr 4 mth. Returning -0.7% compounded while S&P returned -16.7% compounded.

Reasons for selling:

1) There are just too many cheap stocks now out there.

Sell cheap to buy cheaper.

2) I trust Warren's own words on the future of Berkshire

he said in the tune of "returning 1~2% better than S&P

in the future". ....I do really trust his word and his

integrity.

3) My other holdings (they were very cheap when I bought

them) are just ridiculously cheaper...I want to add to

my positions..BRK down 1% for me...my other holdings

are down 45%~60%...you can see the upside....

3) By exiting BRK, I am holding 15% of my portfolio in

cash. And I think sometime in 2009 the market may hit

new low or near the Nov low. Grantham at GMO said there

is 2 to 1 chance that SP will hit 650. I am not trying

to time the market, but analysts' earnings

estimates for S&P are just too optimistic still, when

1Q, 2Q 09 earnings come out....knowing what's coming

is more important than knowing when it is coming...

I am holding cash.....

4) BRk I think is a good buy right now, but not the best

stock for me right now.




mountaincloud
Mountaincloud - 5 years ago
Oh, actually, sold BRK and bought BBEP, LINE and USO (ETF) and after that 15% in cash.

Came across Baupost's 3Q08 letter, and in it Klarman mentiond 2 stocks (locked in return). I looked up his holding and they were BBEP and LINE. Look into them...lock

in dividend, yielding 15% and 20%....they have to payout the dividend because the way these two companies structured.

USO: buying ETF is better than buying bunch of oil companies..hard to cheery pick stocks.....and USO is cheaper so how.....oil can't stay around $35 for too long (my own opinion)
ConsumerMonopoly
ConsumerMonopoly - 5 years ago
LOL. More trips to Omaha to meet with a micromanaging successor? Assertions, predictions and theories delineated in the above article are speculative at best. The managers don't need the money. They love the business, not Warren. Warren loves the business too, and loves the management becuase they love the business. An investment in BRK most likely will beat the market, albeit by a few % points, and is still an outstanding place to build wealth considering its margin of safety. Good place to invest $$$ today. Your alternative is an index fund, which BRK will likley beat. Disclosure: Looking to go long BRK, looking to short Bill Kabourek.
highroic
Highroic - 5 years ago
1. Buffett has always under promised and over delivered. Always (since the early partnership times). He saw a lot of optimism build around his company at the top last year and talked it down.

2. Buffett has thought about all those succession issues and details way better than anyone of us can. Munger has repeated that it is not a real issue other than Buffett's talent can never be fully replaced. But the company is built to thrive with or without Buffett.

3. The current conditions are ideal for Buffett to substantially increase IV and for a while.

4. When he talks about 2% above market returns, he is talking about long term expectations. If you buy BRK at a substantial discount while IV is increasing, your returns will be looking like a fat pitch for a while until the long term trend is reached.

This article is not very brilliant.
thecrustycreditanalyst
Thecrustycreditanalyst - 5 years ago
Consumermonopoly made my case. Berkshire's managers are very rich, not ordinary rich, and do enjoy running THEIR businesses. Warren lets them do this because they perform. But my thesis is that any replacement is not Buffett. He will not give the ceos as much latitude as Warren does and it will no longer feel like their business. I think they will take a powder and that is a very significant risk. It's not fatal, but it certainly causes confusion.

Buffett is great, has built an amazing company, and worthy of emulating. But when he's gone brk-a is a huge insurer with a growing utility component plus a conglomerate. The conglomerate component will likely undergo significant management change and eventual disposition. David Sokal, or any other replacement, will not just be a caretaker, he will attempt to put his own stamp on the company. Brk will tread water for a couple of years.
adamcz
Adamcz - 5 years ago
So you believe that Warren will choose a successor who does not understand Berkshire's success formula as well as 10 gurufocus posters do?
Max7777
Max7777 premium member - 5 years ago


Buffett sometimes waited 20 years to buy certain stocks he liked, at the right price. If you buy BRK at the right price with a huge discount due to market downturn you should make much more than 2% above market returns.

But I am not as sure as some here about the value of BRK without Buffett and how it will be perceived in the marketplace. I rather not be in BRK if I can, when it happens. WEB always invested for the long term (10 years plus), so logically there should not be an immediate or even medium term impact, but I expect there will be, as not every BRK shareholder is as hardcore as the ones on this site. I would treat it as a risk that you need to be compensated for.
jmn3813
Jmn3813 - 5 years ago
Since the day I started value investing, I have had one slogan to live by: "The day Warren Buffett dies will be the greatest day for all value investors". And I would like to share with you why I believe this.

The day Buffett and to a lesser extent Charlie pass on will be the best day for every investor to go long BRK stock. The vast majority of people who currently own BRK are not value investors but rather wealthy individuals and conservative institutions that place their money with the most famous investor of all time. The day Buffett dies all this money will run out of BRK and leave Warren Buffett's life work at a significant discount to its book value. You will be able to purchase all the companies that Warren was able to accumulate (which are also all run independently by their own excellent management teams) over his whole life at prices even he couldn't get.
fxtrader
Fxtrader - 5 years ago
@Jmn3813: The world and all value investors will lose one of the greatest investors and greatest CEOs ever. Yes, you might take advantage and get the stock at a deep discount in that event. But still i do not find this an event to celebrate or to euphorically await as you seem to be doing.

It goes to show that greed for some people obviously trumps everything. If you regard yourself a value investor, forget about it. You may be a bargain hunter. But to be a value investor, you need not just to know about value but you have to have values yourselves and hold them up throughout your life. In this regard, you absolutely fail. You read like a vulture watching his -still walking-next "meal" - and you read like a pretty poor vulture. there are so many companies offering excellent value at pennies for the dollar. One really need not to wait for Buffet to die to make money.

Your post is absolutely disgraceful.

value-is-what-you-get
Value-is-what-you-get - 5 years ago
Warren doesn't give stock tips - they're inherently flawed as anyone who participates here knows well - but he did give one once. He was being interviewed by someone who asked what he was buying and he said he didn't divulge that information or give stock tips and then stopped himself and said I'll give you one stock tip - the day after my death is announced, buy Berkshire. That pretty well sums it up!
alanb9
Alanb9 premium member - 5 years ago
fxtrader,

I didn't read all that greed, misanthropy, vulturism that you read in his post. All I read was essentially what I've seen Mr. Buffett himself say, as already quoted by valueiswhatyouget. If I had read into his post what you seem to, I would probably agree with you, but I think you probably overinterpreted.
fxtrader
Fxtrader - 5 years ago
perhaps I did.

however, a phrase like: "The day Warren Buffett dies will be the greatest day for all value investors" is hard to mis-interpret.

I would miss Warren, his views, his humour and all the wisdom he shells out at the annual meetings. So I really can't see why that shall be a great day or "the greatest" except if the only thing that matters to you were to make a bargain in the stock market
AlbertaSunwapta
AlbertaSunwapta - 5 years ago
Fxtrader - people talk and write "off the cuff".

Anyway, there's nothing especially new in Bill Kabourek's article so I'd suggest that everything that he said above, should also have already be discounted into the current price.

Additionally, many of BRK's own large, long term shareholders have been aging themselves and passing on shares to younger family members and trusts who may have in turn been selling shares for a variety of reasons - further adding to the downward pressure on the price.

Moreover, the decline on Nov 19 and 20th shows the volatility that even companies like BRK can suffer when short term trends are extrapolated well into the future.

Finally, no one doubts that when Warren Buffett passes away, its going to be a tragic loss to the world. However, in terms of BRK's longterm performance no one ever considers that there may be an upside. While, I think they are exceeding long odds, but I'm hoping Warren Buffett is capable enough to pick a replacement(s) that will exceed even his own abilities. Buffett does seem to be as good at judging people, as he is in judging investments. It would be just one more legacy he'd leave the world. And so maybe someday I'll be able to donate all my shares after Buffett's have long since been used up in improving the world.

jmn3813
Jmn3813 - 5 years ago
Fxtrader-

Little harsh with your words there. Obviously, the day Warren dies will be a tragedy for every member of the world (save for the benefactors of the Bill and Melinda Gates Foundation). But from an investor's standpoint, all I am saying is that it will be better for us to all act out of logic and not emotion when Warren is no longer at the helm of BRK.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK