Will Berkshire Hathaway Survive — and Thrive — After Warren Buffett is Gone?
"If we have the same culture, we will be here in 100 years," Buffett says. "Berkshire is built forever."
Happy Tuesday and welcome to our new subscribers!
Last week, the great Dividend Growth Investor posted a short clip of Warren Buffett discussing the importance of economic moats and durable competitive advantages.
And, while describing the qualities that can protect a company from disruption and competition, he made a very interesting comment:
We’re not looking for the best brain surgeon. We’re looking for the Mayo Clinic. We want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades.
Wise words, as usual, from Buffett.
If you’re pursuing a buy-and-hold investment strategy over the long term, then you cannot afford to fill your portfolio with companies that solely rely on the outstanding ability of one person.
Leaders come and go. Eventually, even the best will retire or set off on new adventures. Nothing lasts forever.
But, of course, there’s something funny about Buffett being the one to make this point.
This question — of what will happen to a company that relies on the talent and vision of one outstanding individual — is the very one that engulfs Berkshire Hathaway. Charlie Munger turned 99 a few weeks ago and Buffett, himself, will celebrate #93 in August. It’s not a subject that I like to dwell on, but you can do the actuarial math as well as I can.
It’s the question that will not go away: Is Warren Buffett an irreplaceable leader? Or is Berkshire Hathaway built to survive — and thrive — long after he’s gone?
In other words, is Warren Buffett the best brain surgeon or is Berkshire Hathaway the Mayo Clinic?
Well, get ready for the mother of all cop outs: The answer is a little bit of both.
And here’s why…
Buffett’s unique vision
There’s little doubt that the singular genius of Warren Buffett explains much of Berkshire Hathaway’s success over the past fifty-eight years.
He’s the one who transformed this struggling textile manufacturer into one of the wealthiest companies in the world. A conglomerate of mind-boggling size and power. And one, it should be noted, that no longer has anything to do with textiles.
Buffett often compares Berkshire to an artist’s canvas — his own Sistine Chapel that he can work on to his heart’s content, adding this or that until his masterpiece is complete.
“In a crazy way, I look at Berkshire as a painting,” Buffett said, “and it’s unlimited in size. It’s got an ever-expanding canvas and I get to paint what I want.”
Such grandiose pronouncements are nothing new in the business world, but this one seems especially apt. The modern Berkshire has been shaped entirely in Buffett’s image.
Warren Buffett is right. Berkshire Hathaway is a painting.
But, in this case, it’s a self-portrait.
The loss of a visionary leader need not be fatal
Back in 2011, when Steve Jobs stepped down as Apple CEO, many predicted that the Cupertino-based tech giant would flounder in his absence. It was Jobs, after all, who instilled a culture of audacious creativity and design within Apple — and used his charismatic Reality Distortion Field to sell these new devices to a skeptical public.
The doomsayers had a point: Steve Jobs was Apple.
How could Tim Cook, written off as a nerdy number cruncher, possibly keep this party going?
Remarkably well, in fact.
Under Cook’s steady leadership, Apple has become the most valuable company in the world with a market cap well over $2 trillion. He shepherded along successful new products like iCloud, Apple Watch, and AirPods — and, if the rumors are true, has tasked Apple designers with a project every bit as ambitious as anything dreamed up under Jobs: an autonomous electric vehicle.
Tim Cook grew into the job. A job, by the way, which many considered to be a poisoned chalice.
Hopefully, with Apple making up such an outsized part of Berkshire Hathaway’s portfolio, Warren Buffett has already picked Cook’s brain about the particular challenges that he faced after Jobs’s resignation and death. Or, even better, put Greg Abel in touch with Cook to learn about his experience firsthand.
Luckily enough, Berkshire has built a close relationship with the one person who can understand what Abel will one day go through. Fingers crossed that some of Cook’s magic rubs off on the Berkshire crew.
The next generation of Berkshire Hathaway management
Apple’s transition was made much easier because talent like Tim Cook and Jony Ive were waiting in the wings. Warren Buffett and Charlie Munger surely feel like they have a similar collection of star managers ready to step into the top spots at Berkshire.
I’ve written about Greg Abel on several occasions. From all appearances, Warren Buffett’s hand-picked successor possesses generational talent in running (and growing) businesses. His work with CalEnergy and Berkshire Hathaway Energy is the stuff of legends.
As I wrote back in August:
Greg Abel boasts a managerial — and personal — record second to none. For more than twenty years, he has delivered sizable (and sustainable) results in an honest, forthright manner that is downright Buffett-like.
And, while no one will ever be able to truly replace Buffett, Abel’s star has only grown brighter as he assumes more power in the Berkshire hierarchy.
When Munger says that Greg will keep the culture, I believe him.
Over in insurance, Berkshire is equally well-covered. Ever since purchasing National Indemnity in 1967, the insurance biz (and its resultant float) allowed Buffett to paint his masterpiece in unexpected and exciting ways, to juice investment returns and add operating businesses to the Berkshire empire.
The seeds of today’s Berkshire Hathaway were sown by National Indemnity and other bolt-on insurance acquisitions made over the years.
But, even with his prodigious knowledge of the insurance industry, Buffett never quite cracked long-tail reinsurance (now one of the company’s cash cows) on his own. “Long-tail reinsurance is a terrifying business,” he admitted in 1980. “You can have an obligation pop up twenty years later with a huge price tag that you never anticipated. Reinsurance rarely turns out to be what it’s sold as.”
Then, a few years later, Ajit Jain showed up and that all changed. Under Jain, Berkshire quickly became a giant in the lucrative reinsurance space. He deserves every last accolade that Buffett has ever thrown his way.
In 2022, Berkshire’s insurance operations grew even stronger with the $11.6 billion acquisition of Alleghany Corp. — in large part because it brings Alleghany CEO Joe Brandon back home. For now, Brandon will continue to lead Alleghany as it becomes an independently-operated piece of the Berkshire machine.
But who knows what the future might hold…
Might we be looking at Ajit Jain’s successor?
Or, perhaps, the man tasked with sorting out the mess over at GEICO (and freeing up Todd Combs in the process)?
Ted and Todd
Speaking of which, Warren Buffett’s succession plan for Berkshire Hathaway’s massive investment portfolio remains the biggest question mark in my eyes.
That’s not a criticism of either Ted Weschler or Todd Combs, but a reluctant acknowledgement that we still know very little about their investing philosophies and recent performances.
Whenever Buffett gets asked about his investing proteges, he demurs and deflects the question. For example, here’s what he said in 2021 at the annual shareholder meeting:
They’re both absolutely terrific — and that’s one reason I don’t want people quizzing them on stocks. They are assets of Berkshire. And there’s no reason for them to be out educating other people on how to compete with us.
If you’ve got talent that knows how to evaluate businesses — and those two fellows have gone far beyond that — [they are] terrific assets. They love Berkshire and they work extraordinary hours.
But we don’t really want them going around with people asking them questions about why you like this industry better than that industry or anything of the sort.
Last year, this veil of secrecy lifted an inch or two with both Weschler and Combs appearing in public to answer questions and discuss their careers.
Weschler spoke to Nebraska Furniture Mart’s “i am home” podcast ahead of Berkshire’s annual meeting. Check out my brief write-up of his remarks.
Combs, meanwhile, appeared as the guest speaker at the 2022 Graham & Dodd Annual Breakfast in New York City.
posted a detailed summary of the discussion. Be sure to read the whole thing.
Still, many questions remain.
Like: How will they divide responsibilities once Buffett is gone? Are they comfortable with making big, concentrated moves like Buffett’s recent investments in Apple, Chevron, etc.? Are they still trailing the S&P 500 since first joining Berkshire?
Here’s hoping that we get some answers in 2023.
Decentralization
Warren Buffett tends to deflect compliments about Berkshire Hathaway’s success by insisting that the conglomerate — and its many far-flung subsidiaries — mostly runs itself.
Of course, such a system is only in place because Buffett chose to empower his managers and entrust them with the responsibility to make big decisions. As long as they hit their particular benchmarks in an ethical and forthright way, Berkshire’s central office won’t bother them.
Neither he nor Munger have any interest in micromanaging successful managers who just want to be left alone. Buffett invests his time and effort in finding (and acquiring) the .400 hitters of the business world — not in teaching them a whole new batting style.
“We have decentralized so much and we have so much authority in the subsidiaries that we can keep doing it for a long, long time,” Munger said, “as long as it keeps working. And I would say, so far, that our decentralization has caused more benefits than defects — but nobody seems to copy us.”
One big reason for the lack of imitators is that decentralization is hard.
It’s not in the DNA of many CEOs to step back and let their subordinates run the business as they see fit. Wall Street bigwigs love to talk about the benefits of decentralization — but talk is cheap. Very few follow through and put it into practice.
So, what is Buffett and Munger’s secret?
They possess an otherworldly talent for not only convincing founders to sell their companies to Berkshire, but also persuading them to stay on and run their particular business as a subsidiary.
These (former) owners often receive life-changing, generational wealth when Berkshire buys their companies, but then eschew the chance to retire to some remote island or spend all day on the golf course. Instead, they roll up their sleeves and go back to work the next day as if nothing had happened. Only now, they’re working for Berkshire.
Will Greg Abel have similar success in adding companies to the Berkshire empire, while simultaneously convincing the existing management teams to remain in place?
Of all Buffett’s many talents, I fear that this might be one that is truly irreplaceable.
Can Berkshire keep its culture?
“If we have the same culture, we will be here in 100 years,” says Warren Buffett. “Berkshire is built forever.”
I don’t pretend to know how Berkshire will do in the post-Buffett era. Any strong opinions on either side are probably based on guesswork. But I do think that Buffett and Munger have done everything humanly possible to make the eventual transition a seamless one and to ensure a bright future for Berkshire.
The likes of Greg Abel and Ajit Jain understand the culture of Berkshire better than anyone. Sure, there will be changes ahead — probably starting with a dividend — but the men and women who studied at Buffett’s feet will, for the most part, keep the culture intact.
After that, though, all bets are off. The next generation should be faithful adherents to the School of Buffett, but the one(s) after that are a different story. The culture will eventually start to slip, even in imperceptible ways, and that will only snowball from there. Like I said at the top, nothing lasts forever.
Any talk of keeping the culture for the next 100+ years seems a tad ambitious. But, if any company were to pull off the impossible, it would be Berkshire Hathaway.
great take, cheers!
Really good piece, Kevin. It will be interesting to see how this all plays out. The CEO's of the subs seem to have this tremendous affinity toward Warren and don't want to let him down. Will they feel same toward Greg? Who knows. Will it be business as usual when Warren passes on? Probably initially but over time? Stay tuned.