Since the annaul Berkshire Hathaway BRK.A BRK.B meeting earlier this month, I've noticed a significant increase in editorials criticizing Warren Buffett (Trades, Portfolio).
These articles have attacked the Oracle of Omaha for everything from underperforming the market in recent years to not making the most of the market decline in March and selling his airline stocks.
He has also been attacked for not spending more of his large cash balance and not repurchasing enough shares.
I usually ignore these discussions when they come up because they have historically been a great contrarian indicator. However, something I've been thinking about a lot over the past year or so is what happens to Berkshire after Buffett. The Oracle of Omaha isn't going to live forever, and he's been positioning the conglomerate for his demise for the past decade or so.
The culture he has created at Berkshire is second to none and for that reason, I'm not worried about what happens to the business after its legendary CEO departs.
Nevertheless, Buffett's recent actions have got me thinking: What's the main reason for investing in Berkshire? Is it to invest alongside possibly the greatest investors of the 20th century, or is it to own one of the largest insurance conglomerates on the planet?
Buffett vs. Berkshire
Distinguishing between the two is essential.
If you buy Berkshire to have Buffett effectively manage your money, it becomes important that he's underperforming the market and making mistakes.
On the other hand, if you're buying an insurance business with a great portfolio manager, Buffett's performance becomes less relevant to the overall investment case.
There's no fixed answer to this problem, and this discussion is only designed to express my thoughts on the matter.
Berkshire's standalone strengths
As Berkshire has grown over the years, it has become increasingly difficult for the Oracle of Omaha to beat the market. He has said as much himself on many occasions. The conglomerate has become so big that it struggles to find any investment large enough to move the needle.
Therefore, it has been steadily losing its appeal as an investment fund. There are other funds out there that have been able to chalk up much better returns.
But when viewed as an insurance giant, there's no other company in the world that has the advantages Berkshire possesses.
Its combination of insurance groups, such as National Indemnity, Geico and General RE, can write large policies that no other company has the financial firepower to stomach.
Simultaneously, while most insurance groups invest their capital in large portfolios of bonds, Berkshire has BNSF and Berkshire Hathaway Energy (and the equity portfolio). These compounding machines produce much higher returns than bonds and throw off capital to be used elsewhere.
Put all of the above together, and it seems sensible to suggest that we shouldn't be judging Berkshire based on Buffett's investment decisions today. Instead, we should view the enterprise as a global insurance giant, with a legendary capital allocator at its head.
Buffett won't be around forever, and Berkshire's size means it's unlikely to be able to yield the sort of consecutive 20%-plus per annum returns as in the past. But that does not mean that its competitive advantages in other areas have been eroded. If anything, the company is stronger in insurance today than it has ever been before. If you want to judge Berkshire on anything, that's where we should be looking -- not Buffett's stock-picking performance.
The bottom line
These are just my thoughts on what seems to be a very decisive matter. As an owner of Berkshire, I'm increasingly looking at the business as an insurance giant rather than Buffett's investing performance because it is now far bigger than its CEO.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett: Ignore Asset Allocation, Focus on Value Stocks and Education
- Value Hedge Funds Dive Into Tech Stocks in 1st Quarter
- Prem Watsa Backs Former Buffett Manager David Sokol
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