Should Investors Worry about the Future of Berkshire Hathaway Stock?

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Should Investors Worry about the Future of Berkshire Hathaway Stock?

For the market watchers that follow the Oracle of Omaha closely, the news of Buffett’s early stage cancer brings back the question of the succession plan at Berkshire Hathaway. We know that the successor has already been chosen. Buffett has hinted this in his many media appearances. I have no doubt that Buffett has chosen wisely, who ever he or she might be, and that this individual will carry on the tradition and philosophy of sound investments long after Buffett is no longer making the big decisions.

But investors will be justified in being a little circumspect.

Some of the Recent Actions are Not in Line with Buffett’s Longstanding Philosophy

Succession planning at Berkshire started early. Buffett has been talking abut this for a few years now. Now, the board of Berkshire Hathaway has a name and two backups and have apparently given their full blessing. But does this mean that they have full confidence in one of these 3 individuals’ ability to lead Berkshire Hathaway as capably as Warren has done? Or in the same manner?

Some clues can be found in some of the recent departures that the company has made from the longstanding philosophy espoused by Buffett. For example, consider the BRKB stock split two years ago. Buffett has long held the view that he does not believe in stock splits as he wants to attract long term partners instead of “traders”. Nevertheless, he gave in. How much of this was done with an eye towards succession, by slowly trying to separate Berkshire Hathaway’s identity with that of Warren Buffett, is any one’s guess.

Buffett has also been eager to take an activist approach to investing in the recent years, first with his Goldman Sachs transaction and later with the Bank of America warrants. These are more of a tactical investments, not necessarily a long term investment in solid stable value creating companies that can be held forever.

And was the stock buy back designed to reward the long term shareholders? It is but natural that quite a number of them might be looking to cash in their chips as the change of guard approaches. Or was it simply that there was no better investment that existed in the market then?

If he and the board consider Berkshire Hathaway a forever business that will endure long after Buffett and Munger are no longer at the helm with the successors waiting in the wings, some of these actions are unnecessary and these deviations from his long standing principles a little curious.

Able Managers are Necessary but Not a Sufficient Condition

The quality that brings all these able managers in the stable to work in unison towards a single goal of shareholder wealth creation has been uniquely Buffet’s and Munger’s. Maybe it is infused in the company’s DNA to a large extent, but people change, managers retire, and cultures evolve. The consistency of the last few decades and the disarmingly straightforward and simple ways of these two gentlemen in explaining their investments and philosophy have bred a level of investor confidence that the new management will have to work hard to earn. It can be done, but will take time.

I expect the stock (BRKA) to become a better buy as the management change is effected.