Mohnish Pabrai: Berkshire After Buffett

If you invest in Berkshire Hathaway (NYSE: BRK-B  ) , you've probably asked, "What happens to Berkshire after Warren Buffett passes on?" It's an uncomfortable question, but it's one of the most important topics long-term investors need to think about. It may be the biggest threat to the company's success.

Last month, I asked value investing legend Mohnish Pabrai, who has owned Berkshire for years and had a private lunch with Buffett and Charlie Munger, what he thought about Berkshire's future after Buffett. Here's what he had to say. (Transcript follows.)

Morgan Housel: You've been following Warren Buffett and Berkshire Hathaway for your entire career. There are pictures of Buffett in your office. You've had lunch with Buffett and you've also owned Berkshire Hathaway in your funds. There will come a day when Warren is no longer running Berkshire Hathaway. How will that change your view of Berkshire as an investment?

Mohnish Pabrai: Well, I think it probably won't be run as well as it's run today. I think it's very hard to replicate the skills Warren has, but I think, for example, the investment side of equity investments will go to the managers. There's Todd [Combs] and Ted [Weschler], and maybe they might bring on others in the future. Those guys and what they're doing is at least as good as what Warren is doing, and in fact the advantage they have is they're running the big portfolio.

I think that on that side, the equity investments side, I don't think you'll see much of a meaningful drop in Berkshire's performance or approach. The acquisition side also, it will probably do fine. One of the things that probably doesn't get fully understood is that John Templeton said that there is no securities analyst alive who is right more than two out of three times. So errors are part of the landscape, and they can be when you bought the wrong stock, you sold the wrong stock, you bought at the wrong price, you sold at the wrong price, you didn't buy what you were supposed to buy, or you sold something you shouldn't have. All of these are errors, right?

And so if you look at the wholly owned businesses that Berkshire owns, even a great mind like Warren Buffett has made plenty of errors. I think a lot of the retail businesses are errors. I think some of the other businesses haven't done so well, but plenty of them, the big ones, he's been right. So if you look at it in terms of capital invested, most of the capital has been wisely invested. But if you look at each investment decision with equal weighting -- for example, you look at the Dexter Shoes bet and the BNSF bet being equal -- then you will find there is a significant error rate.

So I would say that you already have a significant error rate with Warren, and I would say his successes may be, might match what he's done. It might be a little bit inferior. The deal flow we have to look at. That's the area that becomes a question, because, you know, the phone rings in Omaha, and the question is: How good is the next CEO in making that phone ring? And so that remains to be seen, but I think in aggregate, Berkshire will continue to do well.

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