Let's get this out of the way -- I'm a huge Warren Buffett fan. Some of the best investing lessons I've ever learned came from reading his annual letters, and there are hundreds of Buffett quotes that all investors should hear.
However, the chairman and CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is not the primary reason I have the stock in my portfolio. Vice Chairman Charlie Munger isn't either -- although he's just as entertaining and informative to listen to. Think about it this way: While we certainly hope they stick around for a while, the fact that a company is being steered by any particular 89- or 96-year-olds isn't exactly the most durable investment thesis for it.
In fact, the reason I plan to own Berkshire Hathaway stock until my retirement (I'm 38) and beyond is precisely because Berkshire Hathaway will do just fine no matter who is at the helm. The company is built to generate market-beating returns for investors with little impact from its CEO.
Berkshire is truly a "ham sandwich" business
In the 56 years since Warren Buffett took control of what was then a struggling textile manufacturer, Berkshire Hathaway has evolved into a massive conglomerate with more than 60 subsidiary businesses. Just to name a few of the most well-known, it's the parent of GEICO, Dairy Queen, Duracell, and Fruit of the Loom.
Owning such a diverse array of businesses might seem like it would create a never-ending job for a CEO, but that isn't the case. In fact, Berkshire gives the managers of its subsidiaries a great deal of autonomy when it comes to running their operations. For example, although Omaha-based Berkshire owns Dairy Queen, the restaurant chain is headquartered in Minnesota and has its own CEO (Troy Bader) who manages the day-to-day operations. There's even a layer between Buffett and the managers in Vice Chairmen Ajit Jain and Greg Abel, who oversee Berkshire's insurance and non-insurance operations, respectively. (Note: One of these two will presumably take over as the next CEO when the time comes.)
Buffett and the rest of Berkshire's management team play very little role (if any) in the operational decisions of its subsidiaries. Of Berkshire's 377,000 employees, just over two dozen actually work at corporate headquarters -- the team's main function is to allocate capital, not to run the company's businesses.
In fact, when Berkshire is considering an acquisition, one of the prerequisites for a deal is that a solid management team is already in place. Buffett's general philosophy is to find great managers and not try to change their methods. As he puts it, "...the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing."
Buffett has referred to certain companies as being so easy to run that a ham sandwich could be CEO and things would run just as smoothly. And that's exactly what he's built in Berkshire Hathaway.
But what about the stock portfolio?
So far, we've addressed Buffett's involvement -- or lack thereof -- with Berkshire's subsidiary businesses. But what about the massive stock portfolio?
Berkshire's stock portfolio is worth over $200 billion, and most of the investments were hand-selected by Buffett himself. And there's no question that he is one of the greatest value investors of all time.
But there's a plan for that as well. His stock-picking lieutenants, Todd Combs and Ted Weschler, have each been given an increasing share of Berkshire's capital to manage, and the results so far have been promising. One of these two was responsible for making Berkshire's first Apple (NASDAQ: AAPL) stock purchase, and the pair is also responsible for bringing Amazon (NASDAQ: AMZN) in the portfolio, just to name a couple of profitable examples.
Combs and Weschler have been groomed for years to prepare them for the day when they'll have to take over Berkshire's investment portfolio. They not only appear to be up to the task, but will largely operate independently of whomever occupies the CEO's desk.
A compounding growth machine with all the right pieces in place
As Buffett said in his most recent letter to shareholders, "Berkshire shareholders need not worry: Your company is 100% prepared for our [his and Munger's] departure."
In a nutshell, Berkshire will do what it was designed to do, no matter who is in the corporate office. The operating subsidiaries will continue to generate capital that can be used to acquire more businesses and buy more stock. Not only does each business have its own independent management team, but the people who will guide the capital-allocating part of the business are already in place.
Berkshire has been a fantastic business with Buffett at the helm, and will continue to be for as long as he's in charge. But once the Oracle of Omaha is no longer the company's leader, not a whole lot will change -- because that's exactly how he designed it.