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Buffett and a Potential Successor Reassure Shareholders on Berkshire's Future

By Billy Duberstein - May 4, 2020 at 8:00AM

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Greg Abel doesn’t see Berkshire’s "huge advantage" changing after Buffett and Munger retire.

Many people own shares of Berkshire Hathaway (BRK.A 0.62%) (BRK.B 0.80%) as the ultimate safe-haven stock that should maintain and grow its value well into the future. However, with Warren Buffett turning 90 this year, and Vice Chairman Charlie Munger already at 96, some may wonder if Berkshire might lose its luster after they are no longer handling capital allocation.

However, this year's virtual annual meeting featured one of Buffett's likely successors -- Greg Abel, who was promoted to vice chairman of non-insurance operations back in January 2018. During the five-hour-long annual meeting, both Abel and Buffett shed some light on how Berkshire's culture and competitive advantages will be maintained well into the future. In fact, Buffett believes his successors will do far better than he and Munger have done.

Here are the highlights on important succession questions from this year's annual meeting. 

Smiling Warren Buffett.

Image source: The Motley Fool.

Berkshire's competitive advantages won't change

When one thinks about Berkshire's long-term keys to success, yes, the brilliance of Buffett and Munger played a large part. However, mere IQ isn't sufficient for successful investing, or for building an enduring franchise. So, what are Berkshire's current competitive advantages, beyond the mere smarts of its managers?

Culture plays a big part, and when asked about maintaining Berkshire's culture, Abel summed up Berkshire's inherent advantages very succinctly:

I don't see the culture of Berkshire changing. I don't see our ability, which -- a large part of that is having the business acumen to understand the transaction, the economic prospects and then the ability to act quickly. I really don't see that changing as we evolve. Listen, there's no one better than Warren and Charlie, but equally, we've got a talented team at Berkshire, both at the Berkshire level and within our managers that can obviously look at opportunities too very quickly. But in reality, it's a huge advantage we have right now, and we would clearly want to be in a position to maintain that, that position of strength. 

Buffett then added his two cents: 

Between Greg and Todd [Combs] and Ted [Wechsler], we've got three extraordinarily good minds in terms of allocating capital. Charlie and I might get a call because of someone we met 20 years ago, but they know a lot more people, they've got a lot more energy, and their minds work the same way as ours have in the past. So I think it could very well be a significant improvement when the three of them are thinking about capital allocation than when Charlie and I are now, particularly now that he's found Zoom. 

Abel will likely take over acquisition activity within the wholly owned parts of Berkshire. Abel came from heading Berkshire Hathaway Energy, which Berkshire acquired through its MidAmerican Energy acquisition in 1999. Under Abel's leadrship, that Berkshire subsidiary as it's grown by leaps and bounds over 20 years to become one of the biggest utilities in the world. Additionally, Abel is also quite well-versed in Berkshire's other large core businesses such as Burlington railroad, acquired in 2009, as well as the other large manufacturing businesses.

Meanwhile, Todd Combs and Ted Weschler are both former hedge fund managers who have been running their own books of public investments for the past several years under Berkshire. Todd Combs has also taken a more active role in other aspects of Berkshire, recently becoming the CEO of GEICO insurance, and also heading up Berkshire's efforts on Haven, the joint healthcare initiative with Amazon.com and JPMorgan Chase. He was also instrumental in Berkshire's acquisition of Precision Castparts in 2015.

Combs and Weschler are thus more likely to make public equity investments than Abel, although for acquisitions of entire businesses, the idea could come from any of them, and all three managers will likely collaborate on any big decisions, as Buffett and Munger have for years.

Ajit Jain's presence will also steady the ship

Of course, the other big Berkshire manager is the vice chairman of insurance operations, Ajit Jain. He has headed the all-important Bekrshire insurance operation for years and is still going strong at age 68. Buffett has long said that Jain is more important to Berkshire's success than he is, given the importance of sound insurance underwriting to Berkshire.

Not only does Berkshire's insurance operations usually provide the company with an operating profit nearly every year -- which is unique for any insurance company -- but the constant stream of insurance premiums provides Berkshire's managers with ample "float" with which to invest. In that light, the most important succession question for Berkshire may not be with regard to Buffett and Munger, but rather with Ajit Jain. 

Berkshire's future remains bright no matter what

When looking at Berkshire's foundation, Abel also made the important point that the three biggest segments within Berkshire -- insurance, Burlington railroad, and Berkshire Hathaway Energy -- all remain rock-solid businesses with very little downside. Not only that, but Abel pointed out that Berkshire Hathaway Energy alone had roughly $100 billion of attractive investment opportunities! These are long-lived projects that produce good returns for long periods of time. As an example, Abel pointed to certain transmission projects that were first begun in 2008 and are just finishing up now.

While Buffett and Munger's public investments get a lot of the attention -- mostly because they are in well-known companies that everyone is able to own, and they're quoted every second during market hours -- investors shouldn't overlook the fundamental soundness of Berkshire's three main wholly owned operating businesses. Those large and consistent growth enterprises provide a very solid foundation for shareholders well into the future. While many are clamoring for another big and splashy new investment, any new moves from Buffett, Munger, Abel, Jain, Wechsler, or Combs would really just be icing on the cake.

While Berkshire may not outperform certain individual stocks over the next 10 years, particularly in technology, I couldn't be more assured of Berkshire's soundness and adequate returns going well into the future. For those worried about the fallout from COVID-19 and the recession to follow, there's still no sounder business around than Berkshire Hathaway, and that will be true even when Buffett and Munger retire.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Amazon, Berkshire Hathaway (B shares), and JPMorgan Chase and has the following options: short May 2020 $75 puts on JPMorgan Chase. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short June 2020 $205 calls on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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