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5 Questions Warren Buffett Must Answer

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Brace yourself, middle America: The value investorati are headed to your doorstep. 30,000-plus vociferous value investors are making their annual pilgrimage to Omaha for Woodstock for Capitalists, also known as the Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) annual meeting.

We're here to swap ideas, share war stories, and, most importantly, soak up the wit and wisdom of Berkshire's peerless leaders, Warren Buffett and Charlie Munger.

But for all the backslapping and hero worship, this year's meeting is anything but business as usual. Berkshire's core business is humming, but the Oracle of Omaha will find himself on the defensive during this year's annual marathon Q&A session. The reason is Sokolgate -- more in a minute -- and we're not expecting disappointed Berkshire investors to pull any punches when it comes to ferreting out what happened.

No Hold Barred
Investors will pepper Buffett and Munger on everything from sovereign default to Sokol's delinquency, but you can't catch the highlights on CNBC. Instead, you can follow along with our crew of Fools as we live blog all the action from the press box. Good thing, because their answers will be doozies -- especially for these five questions that will absolutely, positively get asked ...

1. What really happened with David Sokol?
This is the 800-lb. gorilla story of the weekend. In case you've been chilling with the GEICO caveman for the past few months, Berkshire is acquiring specialty chemical maker Lubrizol (NYSE: LZ  ) . But that's not the headline grabber. The "real" story is that one of Buffett's top lieutenants and the man I considered Buffett's likely successor as CEO, David Sokol, got caught with his hand in the cookie jar.

Berkshire's audit committee threw Sokol under a PR bus with a scathing critique of his actions on Wednesday. Sokol, per the committee, misled Buffett and violated company policies. Meanwhile, Sokol's attorneys are already returning fire.

Enough with the smoke and mirrors. While more information has come to light since the curtains rose for Sokolgate: The Musical, Buffett had a backstage pass to this fiasco from day one. Given that and Buffett's propensity for holding Berkshire out as an ethical oasis, why did he laud public praise on Sokol upon announcing his resignation? Buffett shouldn't have accepted Sokol's resignation in the first place. He should have fired him. Why didn't he?

2. What does Charlie think about Sokolgate?
Charlie Munger has two methods of answering questions at the Berkshire meeting. The first, which he'll use after Buffett has initially addressed a question, is his deadpan, "I have nothing to add." My over/under on IHNTA for this year is 9, for those of you scoring at home.

Munger's second go-to move is to pull no punches. He speaks his mind like only a brilliant billionaire 87-year-old can and doesn't hesitate to publicly disagree with his partner. I'm not expecting fireworks, but I'm hoping that Munger breaks out the whoopin' stick on behalf of those of us without a microphone.

3. Is the Berkshire model broken?
Buffett takes a famously hands-off style to management. He lets his people do their thing and doesn't get in the way. That approach and the company's decentralized model -- only 21 people work at Berkshire's headquarters -- has served the company very well. It also made Berkshire an acquirer of choice for would-be company sellers, many of whom wanted to cash out while still getting the freedom to run their businesses.

But Sokolgate has called into question Berkshire's long-leash style of management and governance. Why aren't senior Berkshire managers subject to greater oversight? Did Berkshire just blunder its competitive edge when it comes to scooping up family businesses on the cheap? And -- gulp -- might it turn out that Buffett isn't the excellent judge of character that we all thought he was?

4. Can we just name Ajit Jain the next CEO, already?
David Sokol is a fantastic operator, but his hard-charging style wasn't a good fit for the top dog slot in the trusting, decentralized culture Buffett has established.

Enter Ajit Jain, the humble insurance wiz whom Buffett has lauded a high school yearbook's worth of superlatives on over the years. Buffett even went so far recently as to say that the Berkshire board would support making Ajit CEO. That's as far as Buffett has ever come to outright showing his succession cards, but I wouldn't mind him laying them all on the table. At a minimum, I'd hope Buffett can begin finding new challenges for Ajit to take on to prove himself out as the kind of leader who can someday run a global conglomerate.

5. Seriously, what about a dividend?
I know, I know. Buffett shreds this question every year. And with good reason: Berkshire's 20.2% compound annual growth rate in book value over the past 45 years is more than double that of the S&P 500. Paying a dividend would have been the worst thing Buffett could have possibly done for Berkshire shareholders.

But this is a new day. Berkshire is getting too big for its britches, as Buffett acknowledges, forcing him to plow money into capital-hungry, lower-return businesses instead of the capital-light businesses he stalked in the days of yore. And, while Buffett and Munger are at the top of their game, these octogenarians aren't getting any younger. Pair lower returns with aging leaders and a now-suspect succession planning process, and suddenly you're looking at a beefy case for Berkshire to start returning cash to shareholders.

The answers
5 down, 55 to go. Buffett and Munger hope to answer at least 60 questions on Saturday. Join us as we live blog the entire experience on Saturday morning starting at 9 AM Eastern. As if the live blog isn't enough, we're firing off Warren and Charlie's top one-liners via Twitter at @TMFInsideValue.

Or you can do us one better: Share your own answers to these five questions in the comment box below. You can also help my fellow Fool LouAnn Lofton choose her Sunday press conference question for Buffett.

Joe Magyer owns shares of Berkshire Hathaway. You can follow him on Twitter at @TMFInsideValue. The Motley Fool owns shares of Berkshire Hathaway, which is a recommendation of both Inside Value and Stock Advisor. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2011, at 2:54 PM, djemonk wrote:

    My guess is that you're not serious in asking whether the Berkshire model is broken. Forty years of market-crushing returns should entitle a guy to make one mistake a decade.

  • Report this Comment On April 29, 2011, at 2:54 PM, jimmy4040 wrote:

    Why? What happens if he doesn't answer your questions? No one is running away from his fund, and he probably wouldn't mind if they did, since he has openly wished on occasion for the opportunity to be more nimble.

  • Report this Comment On April 29, 2011, at 3:03 PM, TMFJoeInvestor wrote:

    @djemonk: No joke. Sarcasm doesn't play well in digital print. I completely agree that Buffett has earned himself a bogey or two. And, yes, Berkshire has a very solid future ahead of it. But the Sokol incident cast a harsh light on the decentralized nature of Berkshire's leadership structure. Clearly, the company needs a more rigid set of internal controls, especially to position itself for a post-Buffett era. And, in light of the likelihood of that happening, there's a chance that potential would-be-acquired businesses that might have otherwise valued selling to Berkshire to maintain autonomy might be less inclined to sell to Berkshire at a sweetheart price.

    @jimmy4040. I think you're taking the "must" part of the headline a bit too literally. These are all questions that are will be hurled at Buffett and Munger in one fashion or another in tomorrow's meeting from Berkshire's investors and take-no-guff journalists Andrew Ross Sorkin and Becky Quick. They're all valid questions and themes, so I expect Warren and Charlie to address them as such.



  • Report this Comment On April 29, 2011, at 3:29 PM, djemonk wrote:

    @TMFJoeInvestor, the decentralized nature of Berkshire is one reason the returns have been so stupendous as it has grown. I don't think Buffett could have kept as many of the managers as he has if he'd micromanaged, which would leave Buffett himself responsible for the day-to-day operations of paint companies, carpet retailers, power companies, and what have you. In that case, he'd have to go out and FIND people to run those businesses, which is a very tough task to assume. He'd greatly multiply the number of opportunities available to make a bad hire, and we'd probably see dozens more Sokol-types. He'd have to turn Berkshire into GE.

    ONE guy got greedy and screwed up. Buffett will get a black eye for this, and it might be deserved, but I really don't understand the (IMO) outsized outcry over this one. This is not a trend, this is one jerk manager getting greedy and screwing him over.

    Anyway, as always, I'm looking forward to the next IV update! Let us know how VIC goes!!!

  • Report this Comment On April 29, 2011, at 3:39 PM, pastreet wrote:

    Seriously? A dividend, from Berkshire? You must be dreaming. What purpose would that serve?

    If you intend to reinvest the dividends, then why do you want the payout in the first place?

    If you intend to spend the dividend payout or invest it elsewhere, you could always sell some stock. Long term capital gains taxes are at 15%, just like dividends. There's really no benefit to dividends versus capital appreciation when it comes to Berkshire Hathaway's returns, at least not for now.

    Reinvesting the income from Berkshire's Portfolio is likely one of the main reasons for their long term success. Why try to change the equation now?


  • Report this Comment On April 29, 2011, at 4:06 PM, TMFJoeInvestor wrote:

    @pastreet: Like I said, not paying a dividend is right up there with Buffett's best capital allocation decisions. But the Berkshire's nature has evolved and the company is chasing progressively lower incremental returns. I'd rather Berkshire not pay a dividend until Buffett steps aside, but it is a fair question to ask nonetheless.

  • Report this Comment On April 29, 2011, at 5:09 PM, bottomfisherman wrote:

    As a middle income earner and investor anything Buffet has to say is totally irrelevant to me. We live in different worlds, his billions buys him influence and friends to help him maintain his status as a billionaire investor. We live on the same planet but are worlds apart. I could care less what Buffet has to say.

  • Report this Comment On April 29, 2011, at 6:43 PM, TMFDarwood11 wrote:

    If I want the 800 pound gorilla, I can purchase Apple, Microsoft and Berkshire stock.

    Ayn Rand would be proud!

  • Report this Comment On April 30, 2011, at 9:35 AM, dcorley wrote:

    It looks like one question to me: Sokol.

    Take a tip from Arnold.. Old news.

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