Warren Buffett Reassures Investors
Investors would rather not imagine life without the Oracle of Omaha, who is 81 and said last month that he had been diagnosed with prostate cancer. And he has no plans to leave the post soon.
When the day comes, people who have studied the company say, Berkshire without Buffett will probably look a lot like Berkshire with Buffett.
Berkshire, which owns roughly 80 subsidiaries that range from a railroad to an upscale kitchen products company, is already decentralized: Of its 270,000 employees, just 24 work at Omaha headquarters.
The conglomerate has a succession plan in place. Berkshire will split Buffett's job into three when he's gone, and the board has chosen the next CEO — although Buffett has said that person doesn't know it yet.
And at least in the short term after Buffett, not unlike Apple in these first months after the death of Steve Jobs, there should be strong institutional pressure to keep doing things the way Buffett did them, Berkshire watchers say.
"Nobody is going to want to mess with what Warren Buffett built," says Jeff Matthews, a Berkshire shareholder and author of "Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett."
To be sure, a Berkshire without Buffett would lose the sheen of celebrity. More than 30,000 shareholders are expected to be in Omaha for the annual meeting and related events that begin Friday.
Buffett and Berkshire's vice chairman, Charlie Munger, who is 88, will spend more than five hours answering questions Saturday — many of them doubtless about what happens to Berkshire when Buffett is gone.
Berkshire's Class A stock remains the most expensive U.S. stock. One share traded for about $122,000 Thursday, near its 52-week high of a little more than $123,500. The Class B shares sell for a more affordable price, about $81.
Buffett says the growth in the stock's book value — the company's assets minus liabilities — has outpaced the Standard & Poor's 500 index in all but eight years since 1965 for a compounded annual gain of almost 20 percent.
Buffett's cancer doesn't appear a threat to the billionaire's life because doctors caught it early, and Buffett plans to undergo radiation treatments this summer.
But even before last month's diagnosis, Buffett acknowledged that his age limits how many more years he has to lead Berkshire. And not everyone is confident about the company after those years.
Meyer Shields, a stock analyst for the brokerage Stifel Nicolaus, says that Buffett is deeply intertwined with the company, making it difficult to assess the importance of his role.
"It's hard to know where Warren Buffett ends and Berkshire begins," Shields says.
In addition to a smaller annual meeting crowd in the post-Buffett era, Shields says Berkshire Hathaway and its next chief executive will have a lower cultural profile.
The next CEO won't have Buffett's reputation and connections, either. So he or she may not get calls like the ones Buffett got from Goldman Sachs and General Electric in 2008.
At the depths of the financial crisis that fall, Buffett bought $8 billion of preferred stock in those companies. They paid him steep 10 percent interest — perhaps because they needed his stamp of approval as much as his cash.
Buffett doesn't plan to retire because he enjoys the work he has been doing for almost five decades far too much. So he has tried to reassure shareholders — without giving away too many details — that Berkshire has a solid succession plan in place.
The highly decentralized structure is part of what gives investors confidence the company can continue with little change.
Berkshire's eclectic mix of companies includes Geico insurance, MidAmerican Energy, the Burlington Northern Santa Fe railroad, Shaw carpet, Helzberg Diamonds, the Nebraska Furniture Mart and Pampered Chef.
And all of Berkshire's subsidiaries run with little input from Buffett. His role is to decide where to invest the excess cash the businesses generate. That's why Buffett jokes that he delegates almost to the point of abdication at Berkshire.
Buffett biographer Andy Kilpatrick, who is also a shareholder, says he thinks Berkshire will continue operating in much the same fashion.
"It's not going to be a disaster. Buffett has thought too much about this, and so has the board," says Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett."
Matthews says Berkshire's next CEO will face pressure to change if the business begins to languish, though. He predicts that shareholders would one day press the company to pay a dividend for the first time since Buffett took over the company in 1965 and possibly to break apart the conglomerate.
And changes like that will become more likely in several years because more than half of Berkshire's board is at least 70, so there will be turnover, Matthews says.
The management model that Berkshire plans to use after Buffett could also result in more conflict between the company's top executives, Matthews and Shields say.
As chairman and CEO, Buffett oversees Berkshire and invests the cash its subsidiaries generate. The company plans to split his job into three roles — CEO, chairman and a head of investment management — after he leaves.
Buffett told shareholders in February that Berkshire's board has chosen someone to succeed him as CEO — someday — and he said there are two backup candidates.
None of the three has been publicly identified. The Berkshire managers believed to be possible chief executive successors are Ajit Jain, who runs Berkshire's reinsurance division; Greg Abel, president and CEO of MidAmerican; Tony Nicely, chief executive of Geico; and Matt Rose, CEO of Burlington Northern Santa Fe.
Buffett has said Berkshire hasn't even told the successor and backups who they are. But he has said that his son Howard, a member of Berkshire's board, would make an ideal chairman.
And Berkshire has hired two hedge fund managers, Todd Combs and Ted Weschler, over the past two years who Buffett says are capable of eventually running the company's entire portfolio. Combs and Weschler manage portfolios worth about $2 billion while Buffett continues to make most of Berkshire's investment decisions.
Howard Buffett says he knows that if he does succeed his father as chairman, his role won't be running the company. Instead, Howard Buffett says he'd be using his knowledge of his father's ideas to help preserve the company's culture.
"I will put the interests of Berkshire ahead of my own personal interests," Howard Buffett says.
Still, the AFL-CIO, which owns Berkshire stock, has submitted a shareholder proposal that's up for a vote at the annual meeting asking whether the company should be compelled to disclose more specifics about its succession plan.
So the subject of Buffett's health is likely to be prominent at the shareholders meeting Saturday. But questions will be coming from a mix of shareholders, reporters and stock analysts.
In other words, Buffett will be asked about plenty of other subjects, too — his view of the economy, the company's earnings in the first quarter, prospects for future Berkshire acquisitions.
No one is giving the Oracle up yet.
Says George Morgan, a finance professor at the University of Nebraska at Omaha and a former investment adviser: "Berkshire is going to be Berkshire for quite some time."
1Q profit more than doubles at Berkshire
Berkshire said Friday its first-quarter profit more than doubled because Berkshire Hathaway Inc.’s insurance units avoided major disaster losses and the paper value of its derivative contracts improved.
Berkshire said it generated $3.245 billion in net income, or $1,966 per Class A share. That’s up from last year’s net income of $1.511 billion, or $917 per Class A share. The earnings report was released as thousands of Berkshire shareholders were gathering in Omaha for Saturday’s annual meeting.
Last year’s results were hurt by $1.1 billion in insurance losses from the Japanese earthquake and tsunami, Australian floods and the New Zealand earthquake.
The overall results fell short of what the four analysts surveyed by FactSet expected. They had forecast Berkshire would report earnings per Class A share of $2,297.50 on $39.154 billion in revenue.
Berkshire says its revenue grew 13 percent to $38.1 billion from last year’s $33.7 billion.
Berkshire’s insurance division, which includes Geico and General Reinsurance, contributed $54 million to the Omaha-based company’s profits. That was much better than last year’s $821 million loss, but slower than past years. Two years ago, Berkshire reported a $226 million underwriting gain in the first quarter.
Berkshire said Geico’s expenses grew as it began to comply with new accounting standards for certain policies and losses were slightly higher.
Price competition remained tough in reinsurance, so Berkshire said its companies continued to refuse to write policies when they considered the premiums inadequate.
The Burlington Northern Santa Fe railroad contributed $701 million to Berkshire’s net income, up from $607 million a year ago.
BNSF said it hauled three percent more carloads in the first quarter of 2012 than it did last year. The railroad said growth in the number of consumer and industrial products it carried offset decreases in coal and agricultural goods.
Last year’s acquisition of specialty chemical maker Lubrizol boosted Berkshire’s manufacturing, retail and service unit. That diverse group of businesses added $854 million net income, up from $558 million a year ago.
Several of Berkshire’s manufacturing companies, such as Acme brick, Shaw carpeting and Benjamin Moore paint, make building products, so their performance continues to be hurt by the slow pace of housing construction.
Berkshire’s utility unit, MidAmerican Energy, added $338 million, up from last year’s $301 million.
Berkshire estimated that its derivative contracts were worth $650 million at the end of the first quarter, well ahead of last year when they were worth $176 million.
The swing in the value of Berkshire’s derivatives contributed to an overall gain on investments and derivatives of $580 million. A year ago, Berkshire recorded an $82 million loss on its investments and derivatives.
The true value of the derivatives won’t be clear for at least several years, because they don’t mature until at least a decade from now on average. But Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.
Berkshire’s operating earnings were $2.67 billion in the first quarter, up 67 percent over last year’s $1.59 billion. Buffett has said Berkshire’s operating earnings are a better measure of how the company is performing in any given period, because those figures exclude the value of derivatives and investment gains or losses.
Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms. Its insurance and utility businesses typically account for more than half of the company’s net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.
“I feel terrific,” he said in response to a question from a shareholder on how feels.Buffett is working with four doctors, and none of their recommendations for treatment involves hospitalization or would require him to take time off from work, he said.
He revealed recently that he has early-stage prostate cancer and will undergo radiation treatment for two months starting in mid-July.
Charlie Munger, vice chairman of Berkshire BRK.A +0.12% BRK.B -0.39% and a longtime friend of Buffett, joked that he resents all the attention that the 81-year-old CEO is getting.
Buffett also touched on the company’s succession plan, stressing that the successor is someone who is able to assess risk and allocate capital.
The successor is not someone who would turn off Berkshire’s managers nor someone who would change the company’s unique culture, he said.
“Don’t worry about my successor,” he added.
Berkshire announced in February that its board has found Buffett’s successor, but did not identify the person.
In response to questions about why the company is unwilling to pay dividends, Buffett said he doesn’t believe dividends will add to intrinsic value and prefers to boost the company’s worth through investments.
Munger chimed in to say that dividends will come in “due course.”
Berkshire last paid a dividend of 10 cents in 1962, which Buffett considers a mistake.
As for stock buybacks, Buffett said the company will act when shares are significantly undervalued. And when it does, it will be on a large scale.
“We would like to buy billions and billions of stocks back as long as we don’t take our cash position below $20 billion,” he said.
He also took the opportunity to once again push for the Buffett Rule, which calls for higher taxes on the wealthy.
“Tax laws favor people who make lots of money,” he said, noting that many high-income earners pay less than his cleaning lady, who pays 15.3% on her Social Security tax.
On investment matters, Buffett is open to new deals but he is not likely to consider transactions over $20 billion, because anything over that would be too risky.
“We are never going to risk what we have and need for something we don’t have and don’t need,” he said.
China, a favorite subject in the investment community, was brought up by a shareholder who wanted to know what advice Buffett and Munger had for the world’s second-largest economy.
Based on the questions Buffett got from the crowd of more than 30,000 at the company's annual meeting in Omaha on Saturday, Berkshire shareholders are taking him at his word.
Despite the fact that Buffett just disclosed the condition last month, he didn't face the first question about his health until well into Saturday's questioning. Many of the questions at the meeting either focused in on technical aspects of Berkshire's many businesses or dealt with general economic or political topics. One highlight of the discussion was the revelation that he recently attempted to make a more than $20 billion acquisition.
"I feel terrific. I love what I do," he said. Buffett told shareholders that the survival rates for prostate cancer look so good that he thinks the diagnosis is a "non-event."
It would hardly be the first time that Buffett's assessment would be trusted. Widely known as the Oracle of Omaha, Buffett, 81, is considered the greatest celebrity in investing because of his many profitable decisions. Buffett has said his four doctors caught his cancer early, and it doesn't represent a serious threat to his health. He plans to undergo radiation treatment in July, but the treatment should have little effect on his daily routine.
"I may have a little less energy, but that may mean I do fewer dumb things," Buffett said jokingly.
Still, the diagnosis is forcing shareholders to confront the fact that one day Buffett will no longer be at the helm of the conglomerate, which includes an eclectic mix of companies such as Geico insurance, MidAmerican Energy, the Burlington Northern Santa Fe railroad, Shaw carpet, Helzberg Diamonds, the Nebraska Furniture Mart and Pampered Chef. Several questions dealt with related topics, such as who will replace Buffett when the time comes.
Buffett told shareholders in this year's annual letter that the board has picked someone to succeed him as CEO if the need arises immediately, and it has two backup candidates. But Buffett hasn't publicly identified his successor. During the business portion of the meeting, Berkshire shareholders overwhelmingly rejected a proposal that would have required annual updates on how the company is preparing to replace Buffett.
However, Buffett did address a challenge that his successor may face and talked about the way his successor will approach the job.
One of the first questions of the day was about whether his successor will be able to make the same kind of deals he has, such as the $8 billion Berkshire invested in preferred shares of Goldman Sachs Group Inc. and General Electric Co. during the crisis of 2008. Goldman and GE both wanted Buffett's stamp of approval along with Berkshire's money.
"I don't think that every deal I have made could be makeable by a successor," Buffett said.
But Buffett said his successor will still be able to make big deals because Berkshire has nearly $40 billion in cash on hand and is willing to invest large amounts quickly.
Buffett said deals like the ones with Goldman and GE haven't been as important to Berkshire as investing in Coca-Cola Co. or IBM stock or buying entire businesses such as Iscar metalworking and Burlington Northern.
His eventual successor will maintain the company's culture and continue to let key managers run Berkshire subsidiaries with little interference, Buffett said. He's known for his hands-off, decentralized management style.
"You do not need to worry about my successor," he said.
Shareholder John Zerngast, of Olathe, Kan., said the stock market might be uneasy about Buffett's age and that of 88-year-old Charlie Munger, but it shouldn't be because of how much Berkshire's 80-odd subsidiaries and investments are worth.
"I don't worry about Warren and Charlie because the underlying value is there," Zerngast said.
Besides all the companies Berkshire owns outright, it has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co. On Friday, Berkshire said its first-quarter profit more than doubled to $3.2 billion from last year's $1.5 billion because this year's results weren't hurt by major disaster losses in Berkshire's insurance units.
Buffett says the growth in the stock's book value _ the company's assets minus liabilities _ has outpaced the Standard & Poor's 500 index in all but eight years since 1965 while delivering a compounded annual return of almost 20 percent. In recent years, Buffett has repeatedly warned investors not to expect that type of return in the future because Berkshire's size makes it nearly impossible to keep growing at that rate.
Based on the questions Buffett got from the crowd of more than 30,000 at the company's annual meeting in Omaha on Saturday, Berkshire shareholders are taking him at his word.
Despite the fact that Buffett just disclosed the condition last month, he didn't face the first question about his health until well into Saturday's questioning. Many of the questions at the meeting either focused in on technical aspects of Berkshire's many businesses or dealt with general economic or political topics. One highlight of the discussion was the revelation that he recently attempted to make a more than $20 billion acquisition.I feel terrific. I love what I do," he said. Buffett told shareholders that the survival rates for prostate cancer look so good that he thinks the diagnosis is a "non-event."
It would hardly be the first time that Buffett's assessment would be trusted. Widely known as the Oracle of Omaha, Buffett, 81, is considered the greatest celebrity in investing because of his many profitable decisions. Buffett has said his four doctors caught his cancer early, and it doesn't represent a serious threat to his health. He plans to undergo radiation treatment in July, but the treatment should have little effect on his daily routine.
"I may have a little less energy, but that may mean I do fewer dumb things," Buffett said jokingly.
Still, the diagnosis is forcing shareholders to confront the fact that one day Buffett will no longer be at the helm of the conglomerate, which includes an eclectic mix of companies such as Geico insurance, MidAmerican Energy, the Burlington Northern Santa Fe railroad, Shaw carpet, Helzberg Diamonds, the Nebraska Furniture Mart and Pampered Chef. Several questions dealt with related topics, such as who will replace Buffett when the time comes.
Buffett told shareholders in this year's annual letter that the board has picked someone to succeed him as CEO if the need arises immediately, and it has two backup candidates. But Buffett hasn't publicly identified his successor. During the business portion of the meeting, Berkshire shareholders overwhelmingly rejected a proposal that would have required annual updates on how the company is preparing to replace Buffett.
However, Buffett did address a challenge that his successor may face and talked about the way his successor will approach the job.
One of the first questions of the day was about whether his successor will be able to make the same kind of deals he has, such as the $8 billion Berkshire invested in preferred shares of Goldman Sachs Group Inc. and General Electric Co. during the crisis of 2008. Goldman and GE both wanted Buffett's stamp of approval along with Berkshire's money.
"I don't think that every deal I have made could be makeable by a successor," Buffett said.
But Buffett said his successor will still be able to make big deals because Berkshire has nearly $40 billion in cash on hand and is willing to invest large amounts quickly.
Buffett said deals like the ones with Goldman and GE haven't been as important to Berkshire as investing in Coca-Cola Co. or IBM stock or buying entire businesses such as Iscar metalworking and Burlington Northern.
His eventual successor will maintain the company's culture and continue to let key managers run Berkshire subsidiaries with little interference, Buffett said. He's known for his hands-off, decentralized management style.
"You do not need to worry about my successor," he said.
Shareholder John Zerngast, of Olathe, Kan., said the stock market might be uneasy about Buffett's age and that of 88-year-old Vice Chairman Charlie Munger, but it shouldn't be because of how much Berkshire's 80-odd subsidiaries and investments are worth.
"I don't worry about Warren and Charlie because the underlying value is there," Zerngast said.
Besides all the companies Berkshire owns outright, it has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co. On Friday, Berkshire said its first-quarter profit more than doubled to $3.2 billion from last year's $1.5 billion because this year's results weren't hurt by major disaster losses in Berkshire's insurance units.
Buffett says the growth in the stock's book value ' the company's assets minus liabilities ' has outpaced the Standard & Poor's 500 index in all but eight years since 1965 while delivering a compounded annual return of almost 20 percent. In recent years, Buffett has repeatedly warned investors not to expect that type of return in the future because Berkshire's size makes it nearly impossible to keep growing at that rate.
That's fine with George Jensen and his wife, Setara Jensen, who bought Berkshire stock as a stable option in retirement. The Jensens traveled from Hong Kong to attend the shareholder meeting and visit friends from when Jensen worked for Union Pacific railroad before retiring.
"We bought it because it's a good value," Jensen said. "There are certainly things that might have a higher rate of return, but at this stage, we wanted something safe and stable."
Buffett said that he recently was negotiating a $22 billion acquisition that didn't work out. He wouldn't disclose the details, but he used the transaction as an example of the biggest acquisition Berkshire would make right now.
The company acquired Burlington Northern railroad in 2010 in a cash-and-stock deal valued at $26.7 billion that was Berkshire's biggest acquisition ever. Buffett has always hated using stock in acquisitions, and he said Saturday that he now thinks it was a mistake to do so in the BNSF deal even though he is glad Berkshire owns the railroad.
Buffett also defended Berkshire's purchase last year of the Omaha World-Herald Co. He said even though he has highlighted the challenges newspapers face, the deal still made sense for Berkshire, which already owned the Buffalo News and a large stake in the Washington Post Co. Newspapers are usually still the primary source of local information, and that's an advantage in places where community is important, he said.
Buffett also defended political comments he has made while supporting President Barack Obama and lobbying for higher taxes on wealthy investors like him.
"When Charlie and I took this job, we did not agree to put our citizenship in a blind trust," Buffett said.
Buffett always plays the role of Berkshire's chief marketing officer at the annual meeting by showcasing products made by the company that are being sold in the 200,000-square-foot exhibit hall. On Saturday, he revived the newspaper tossing skills of his youth, promising anyone who can throw a folded Omaha World-Herald ' one of Berkshire's latest acquisitions ' closer to the porch than him, a Dilly bar from Dairy Queen.
As Buffett roamed the exhibit hall, shareholders mobbed him, trying to take pictures with their cellphones. He spent time singing "There is No Place Like Nebraska" with the University of Nebraska's cheerleaders at the Justin Boots stage before checking out the Burlington Northern Santa Fe railroad and BYD electric car displays.
The resolution submitted by the AFL-CIO to require updates on how the company would replace Buffett attracted about 32,000 votes while 672,000 votes were cast against the idea. The board and Buffett had opposed the idea.
The labor union's Ken Maas said the group didn't want Berkshire to publicly identify the 81-year-old Buffett's successor. It just wanted an annual update on the planning.
Buffett said he doesn't see any need to create a formal report on succession planning because he talks about it in his annual letter to shareholders and in interviews. Plus, the subject regularly comes up at the annual meetings.
"We spend more time on that subject than any other subject that might come before the board," Buffett said.
Buffett has said Berkshire plans to split his chairman and CEO job into three parts with a chief executive, a chairman and several investment managers.
Buffett has said he believes his son Howard, who already serves on Berkshire's board, would make an ideal chairman.
And Berkshire has hired two hedge fund managers, Todd Combs and Ted Weschler, over the past two years who Buffett says eventually will be capable of running the company's entire portfolio. Buffett said Saturday that both Combs and Weschler were excellent hires, and the two men are now managing $2.75 billion each while Buffett oversees the remaining roughly $150 billion.
Buffett has said he remains in good health, and has no plans to retire because he enjoys running the conglomerate he built.
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