3 Burning Questions Warren Buffett Must Answer

OMAHA -- The world's eyes are on Warren Buffett. Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) stock is sagging, its future is uncertain, and its relentless leader's health is in question. And starting Saturday, 30,000 investors from around the globe will converge on Omaha to hurl questions at history's greatest investor at Berkshire's annual meeting.

The stakes have never been higher for Berkshire investors, which is why the Fool has dispatched a team to scenic Omaha to deliver rapid-fire coverage and commentary that you can follow at www.Berkshire.Fool.com. And the questions will flow hot and heavy. Buffett and longtime partner Charlie Munger will face dozens of questions on Saturday, but these are the three burning questions on investors' minds.

Question 1: What will fix Berkshire's stock price?

Berkshire investors are spoiled. Decades of market-drubbing returns have made the past few years feel like the morning after Christmas. The "Buffett premium" the market is willing to pay for Berkshire has shrunk as investors fret over whether the Oracle has lost his touch and who will run the show after he has moved on. Berkshire's shares, which sold at an average 50% premium to book value over the past decade, now swap hands at only a 20% premium.

Have a look:

Source: S&P Capital IQ.

Not that Buffett is sitting on his hands. He launched a revolutionary stock repurchase program in September, offering to buy back shares if they fell below a 10% premium to book value, and dropped clues in his annual letter to shareholders about how he privately values Berkshire. Buffett plays his cards close to the vest when it comes to Berkshire's stock price, making these moves as close as he'll get to saying "This stock is dirt cheap."

But Buffett's job is to manage Berkshire's business, not massage its stock price, and Berkshire's contrarian shareholders should understand that better than anyone. Those who don't should move on. That leads to the next urgent question.

Question 2: Who is Buffett's replacement?

Buffett was never getting any younger, but the market has become obsessed with succession after the embarrassing exit of heir apparent David Sokol and the disclosure that Buffett has prostate cancer. And there's good reason for concern: Buffett is a once-in-a-century talent, and Berkshire won't be the same without him. He's so prolific that his roles of chief executive and de facto chief investment officer will be split in two when he's gone.

Analysts are jabbering about the CEO succession plan as if it were a horse race. The smart money is on Ajit Jain, the quiet head of Berkshire's massive reinsurance group and close Buffett confidant. As Buffett said in his 2009 letter to shareholders, "If Charlie, I and Ajit are ever in a sinking boat -- and you can only save one of us -- swim to Ajit." But Greg Abel, the head of Berkshire's MidAmerican Energy business, and Matt Rose, who heads up BNSF Railway, are also worthy candidates who run major business units.

And then there is the management of Berkshire's precious, prodigious investment portfolio. Buffett has signed on two proven young whippersnappers, Todd Combs and Ted Weschler, to manage a couple billion dollars apiece on behalf of Berkshire. Buffett shrewdly incentivized Combs and Weschler based not only on long-term performance, but also on how well the other young gun performs. The result? A tag team in the mold of a young Buffett and Munger working together, rather than vying for greater personal glory.

Buffett should just say no to investors demanding names. Buffett's prostate cancer thankfully looks easily beatable -- he isn't even starting treatments until mid-July -- which means he may well run Berkshire for several more years. Tabbing a successor today would dishearten the short-listers who get passed over and rob Buffett of time to evaluate the primary candidates. Why buy a car today that you can take for a years-long test drive?

Question 3: Has Buffett gone astray?

Buffett and Munger are like a fine port -- they keep getting better with age. They're both voracious readers and relentlessly focused on widening their circles of competence. Still, Berkshire raised eyebrows in 2008 when the company invested in hyper-growth Chinese battery manufacturer BYD. Questions morphed into praise when BYD's stock took off, and investors lauded Buffett and Munger for having the intellectual dexterity to hit a home run outside their strike zone. It was as if Michael Jordan had started playing baseball -- but was actually good at it.

The praise was almost as short-lived as Jordan's baseball career. BYD's high-priced stock came crashing back to earth because of intense competition and the gravitational laws of valuation. And then Buffett raised investors' other eyebrows this year when he invested $11 billion in IBM (NYSE: IBM  ) , a longtime poster boy of technology stocks. Are Buffett and Munger fixing something that isn't broken or demonstrating personal growth? We'll get a taste on Saturday.

Exclusive: The Berkshire 2012 Experience

The Berkshire meeting isn't televised, there is no transcript, and you won't find it on YouTube. That's why we're here in Omaha -- to bring you behind the curtains to experience the exclusive action. Head to www.Berkshire.Fool.com for our real-time coverage of the full Berkshire 2012 experience. We'll be live-blogging Warren and Charlie's epic question-and-answer session on Saturday, tweeting and photographing the choicest moments of the weekend, and serving up video commentaries on the angles all investors need to know about. We're even sharing our notes and top stock ideas that bubble up from the Value Investing Conference and Value Investing Congress that bookend the Berkshire meeting.

The best part? www.Berkshire.Fool.com is free -- a very good price. Just ask Warren Buffett.

Foolish Best,

Joe Magyer

Joe owns shares of Berkshire Hathaway. The Motley Fool owns shares of International Business Machines and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (14) | Recommend This Article (42)

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 May 04, 2012, at 6:39 PM, LoadDrive wrote:

    As for Question# 1. The stock may do better IF Buffett would get back to work “Minding The Store” instead of Running around the country with Obama, saying how we need to be Taxed More !

    On to Question# 2. The lizard from Geico would be a Good candidate…”The Lizard sounds like it minds “The store better then Buffett.

    For Question# 3. Yes…Buffett has gone astray (See my Question #1.) Buffett would have done better IF he would have put the investors’ money into the S&P 500 over the last 5 years.

    Wishing All "Good-Luck on your investments!

  • Report this Comment On May 04, 2012, at 6:56 PM, SAMSCREEK wrote:

    LoadDrive,

    I agree with you completely.

    Mr. Buffett is one of the rich people that likes to

    preach "don't do as I do, do as I say", when it comes to paying income taxes.

    He takes full advantage of the tax codes and I

    haven't heard that he has written any xtra checks

    to the treasury.

    He may be good at investing, but I think he is

    full of B.S.

  • Report this Comment On May 04, 2012, at 8:49 PM, richardrollo wrote:

    I agree with LoadDrive and Samscreek. He deserves all the respect in the world for his earlier business career but his political involvements have almost descended into buffoonery. He has been prancing around like a has-been Hollywood celebrity trying to stay on the national stage through politics. Like those Hollywood has beens, he needs to spare us his political genius. I think such behavior, even if I agreed with the politics, would be poisonous for a company. I can think of two companies in the 1960's that were hugely successful until their leadership became more interested in the politics of the day than their business. Then pssssst the bubble burst.

  • Report this Comment On May 04, 2012, at 9:49 PM, Maiestas wrote:

    It is foolish to think that after a few years of below historically significant returns that Berkshire has gone astray. Even the Oracle himself emphasizes that you need to look at a 5 year company performance and beyond rather than a year or two...Peter Lynch even claimed that over a 1-3 year period you might as well flip a coin in terms of a companies tock price performance. Has he gone astray with his investments? A few, yes, The Omaha World Herald made no sense and getting into tech stocks was shocking, however, he did make a billion plus on BYD and he Berkshire afterall is evolving with IBM...and hiring two investment managers who may be more capable than we think is a vital part of this evolution.

    If I had one company to put my money in, with or without Buffet, but preferably with, it would be Berkshire Hathaway. History does repeat itself, perhaps not as forcefully, but it repeats- you can be sure of that.

    513,055% to date

  • Report this Comment On May 04, 2012, at 9:55 PM, rmondave2 wrote:

    Warren is in bed with the federal bureaucrats and the administration: PROOF, his investments in WFC and GS are essentially backed by the taxpayer, AND look at the Keystone pipeline, vetoed by OBAMA, that pipleline competes directly with Warren's railroads in hauling oil and gas! A more corrupt deal could not be found in Omaha for the last 200 years! Our country has morphed into Facism and very few people see it yet.

  • Report this Comment On May 04, 2012, at 10:02 PM, rmondave2 wrote:

    When the big, corrupt business interests own or control most of the big media, own the politicians, the truth does not come out, however the independent thinkers see the truth long before the unwashed masses of sheeple. Obama and his handlers have a little pact with Buffett, we will guarantee your investments in the Banks, Goldman Sachs, Wells Fargo, and we will also protect your railroad investement by stopping the pipeline project, and in exchange you just be our "shill" and talk up the need for higher taxes The sheeple will all think they can be rich like you by PAYING MORE TAXES :)

  • Report this Comment On May 04, 2012, at 11:10 PM, Frankydontfailme wrote:

    Maybe if he invested in gold, he'd be able to help out his shareholders.

    http://timiacono.com/index.php/2012/03/05/warren-buffett-pri...

  • Report this Comment On May 05, 2012, at 1:48 AM, ponchopeirce wrote:

    yes he is very good.....i agree w/the above excellent cmmts....however the big C is not a killer as me [77 yrs] & old men will die of some way...... his old age is show'g & the tax talk is funny....he can't let go..so feel sad 4 him....like the bible says their r seasons [eg: time 2 plant....culitvate......harvest....]. he needs 2 pass the leadership & move on.[harvest his lifew/grandkids & give his $$$$away. go fish'g ,but ego is 2 big, his hat does not fit any more. he made is $$$$ & i & u do not need his politics B S. Shalom pap

  • Report this Comment On May 06, 2012, at 8:53 AM, Lionel27km wrote:

    just another article to keep up the flow of text.

  • Report this Comment On May 06, 2012, at 2:54 PM, enegola wrote:

    Westport has declined 24%. Are you still recommending it as a buy?

  • Report this Comment On May 06, 2012, at 8:32 PM, mommadaisy wrote:

    I bought one share of Berkshire Hathaway class B stock several years ago and now have 50 shares after the split. The current value has rarely reached the amount I invested. Why doesn't Berkshire pay dividends to the stockholders?

  • Report this Comment On May 07, 2012, at 8:05 PM, Ragingmoose wrote:

    Cramer was not very hot with Berkshire tonight. He's telling << The parts worth a lot more than the whoe.>>

    Wath do you think of that ?

  • Report this Comment On May 09, 2012, at 11:36 PM, steveelcpo wrote:

    The one I would love to hear answered is what the heck (I would use something stronger but we're supposed to be respectful) was he thinking when he gave Obama ammunition to raise taxes???? Someone as wise as Buffet should know that continuing to invest in an organization that runs a $1.2 trillion deficit each year, hasn't passed a budget since Apr 2009, and ignores the recommendations of its own Simpson-Bowles Commission to find ways to cut spending, and wastes millions/billions of $$$ a year on things like Solyndra isn't worthy of continued investment at the current rate, much less giving it more money to waste. When Buffet supported Obama with what has become the "Buffet tax", I really thought the beginning stages of senility were setting in.

  • Report this Comment On April 30, 2013, at 1:37 AM, TMFJoeInvestor wrote:

    In hindsight, it's a shame that most of these comments addressed issues that had nothing to do with Berkshire and its valuation -- gold, Buffett's position on personal income taxes, etc. The shares are since up considerably. Probably a good lesson to be learned.

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