Hear the nicknames Oracle, Wizard or Sage, and we think of someone out of a Tolkien novel. Then casually mention the city Omaha, and there’s no doubt in anyone’s mind that it refers to none other than Warren Buffett. And with good reason, too. He’s like a financial prophet when it comes to making the best investments.
Buffett’s advice has been sought out by everyone from Barack Obama to Marc Zuckerberg, and his unorthodox opinions on politics, combined with five decades of bullish business savvy, earn him both respect and controversy. The only thing that seems to precede Buffett’s reputation is his wealth — at a net worth of $44 billion, he’s the world’s third richest man from 47 years of helming Nebraskan investment firm Berkshire Hathaway. He’s also known for his frugality in spite of his massive fortune.
It’s also no secret that Buffett, 81, battles prostate cancer, leaving Berkshire’s uncertain future hanging in the balance.
Buffett has gone on record stating that the cancer is treatable and non-life-threatening, and that it won’t have a negative effect on Berkshire Hathaway. But will investors feel the same optimism? Frankly, it’s hard to imagine the world of investing without Buffett in the picture. Financial experts have made note that Berkshire stock hasn’t exactly been performing too hot in the past few years; shareholders, they theorize, may just as soon completely turn their backs on a non-Buffett-fronted Berkshire.
The enigmatic Buffett has also skirted the issue of who may eventually replace him as Berkshire CEO, leaving doubt in the minds of many people if the company will ever find a suitable successor, and if Berkshire will succeed or fail under new leadership. Considering the factors at hand, all signs point to the notion that Berkshire Hathaway is doomed with no Mr. Buffett.
Buffett: Berkshire’s Biggest Investment?
It’s common knowledge — all Warren Buffett investments are like gold. MSNBC even dedicates a page to the man, the Warren Buffett Watch, in which they keep track of the investor’s best-performing stocks. The most lucrative Berkshire Hathaway holdings value into the billions. According to MSNBC, the firm’s top three:
- Coca-Cola: With a value at $15.3 billion, Berkshire holds 200 million shares for an 8.8-percent stake in the cola company.
- IBM: A $12.9 billion venture, a 5.3-percent hold in the tech giant with over 64.3 million Berkshire shares.
- Wells Fargo. Berkshire’s holding value, says MSNBC, is over $12.7 billion, its stake in the company over 7.4 percent.
However elusive self-made billionaire Buffett has been regarding his health troubles, he can’t hide his mortality from his supporters. According to Yahoo Finance, immediately after the cancer announcement in April, Berkshire A and B class shares dropped; some sources say by 1.3 percent. It could imply that shareholders aren’t investing in Berkshire, they’re buying — and selling — stock in Buffett.
Stock watchdog InvestorPlace speculated earlier this year that Berkshire Hathaway’s best days may be behind them, even with Buffett. On the whole, Berkshire is nothing short of infallible — as an investment itself, according to InvestorPlace editor Jeff Reeves, Berkshire has amassed a compounded annual gain of 19.8 percent since Buffett took leadership in 1964.
That’s double the amount, he said, of the S&P 500′s 9.2-percent return. Reeves also said that Berskhire is up over 513,000 percent since the mid-1960s versus 6,400 percent for the S&P 500. And in the last quarter of 2011, Berkshire’s cash flow increased by $3 billion in just three months, to $37.3 billion.
However, according to Reeves, Berkshire Hathaway’s shortcomings have been evident for at least the last few years. Since 2009, the investment firm’s returns have steadily dropped on an annual basis, from 19.8 percent that same year, to 13 percent in 2010, to 4.6 percent last year. Berkshire has added only 20 percent in returns in those three years, compared to the S&P, up 46.6 percent in the same time frame.
InvestorPlace said that in the fourth quarter, Berkshire’s net income also dropped 30 percent, from $4.38 billion in Q4 2011 to $3.05 billion. Noting some of these failings, the website opined that some new blood at Berkshire Hathaway might be needed.
Warren Buffett is 81. Berkshire Hathaway vice chair Charlie Munger is 88. It makes realistic sense that both men will likely pass the torch to younger leadership in the near future. But to whom?
After his cancer scare (which Buffett described as a “non-event”), the CEO and Munger were compelled to placate skeptical Berkshire investors at the company’s annual meeting last month that Buffett would not be stepping down — and with Buffett’s shining status, few people could ever be readily accepted as his replacement.
According to an April Wall Street Journal report, Buffett said that Berkshire’s board of directors has already picked his successor, as well as two backup candidates — both of whom are men. As to who they are, mum’s the word from the Omaha Oracle, with only a cryptic response from Buffett at the meeting. “We’re not going to have an arts major in charge of Berkshire,” Buffett was quoted by Reuters as saying.
That doesn’t stop anyone from guessing who it could be. The Wall Street Journal recently spoke with a pair of financial researchers who, after poring over thousand of pages of annual Buffett-penned reports, counted a few key names that Buffett has mentioned from time to time. (Buffett’s “Owner’s Manual” has been published for the last 16 years.) The researchers discovered that Buffett has favorably referred to Ajit Jain, head of Berkshire’s reinsurance group, 102 times; second to Jain, and acknowledged by Buffett 60 times, is Tony Nicely of GEICO (one of Berkshire’s holdings).
More names bandied about by Buffett, according to the Journal, include Tad Montross, CEO of General Re; Brad Kinstler, CEO of See’s Candies; Greg Abel of MidAmerican Energy; Don Wurster of National Indemnity; and Kevin Clayton of Clayton Homes.
The Journal says that Jain, 60, could be Buffett’s favorite due to his similar managerial style. “Jain,” said the Journal, “is viewed as a tough negotiator who is willing to let a deal go if he can’t get the price he wants.”
Buffett offered up more clues in 2009 to Jain as his possible successor when he said, “If Charlie (Munger), I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”
A Buffett-Less Berkshire
Still, even with glowing admiration of Jain from Buffett, there’s too much at stake for anyone to reproduce that Buffett magic for Berkshire Hathaway. Forty-nine million dollars in cash, amassed over five decades, are saved up only in part of a careful scrutiny, from a keen investing eye that only Warren Buffett can muster. Companies owned by Warren Buffett are like a greatest hits of home-run commodities compiled from an investing master: Benjamin Moore, Dairy Queen, the Omaha World-Herald, Wesco Financial, and the aforementioned GEICO, General Re and others, are just a fraction of Buffett’s acumen.
It’s hard to admit that Berkshire Hathaway, at best, will waver without Warren Buffett — and at worst, it will go under completely without his leadership. It’s even harder for some to accept a world, much less a Berkshire Hathaway, without Warren Buffett in it. Allison Kade of LearnVest says that in the meantime, all that Berkshire supporters can do is take away some advice from the man from Omaha himself:
- Make long-term investments. Buffett is known for having patience with underdog stocks, taking time to find new investments and investing in them for the long, not short term.
- Don’t listen to the haters. Buffett always advises against investing in what’s trendy. Fad investments come and go and are rarely profitable; research into sound investments, on the other hand, are what earn money.
- Don’t fear the competition. LearnVest cites Buffett’s rule that an investor shouldn’t be scared off by other investors’ emotional responses to the stock market. In investing money, Buffett would makes decisions based in logic.
- Stop looking for a quick buck. Sometimes Warren Buffett gives the best investment advice when he gets in Yoda mode: “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”
And with that, it might not be Warren Buffett’s absence that determines if Berkshire Hathaway is doomed to fail, or poised to succeed, but from the company’s real decision makers — the investing public.