The news is finally official: Warren Buffett will step down as Berkshire Hathaway's (BRK.A +0.36%)(BRK.B +0.32%) chief executive officer by the end of 2025. Why? "There was no magic moment," Buffett told reporters. "How do you know the day that you become old?"
If you think Berkshire Hathaway is no longer a good investment without Buffett at the helm, think again. He has been getting the transition ready for years.
In many ways, little will change. The company will largely be headed by his handpicked successors, who are already employed by Berkshire. This team is responsible for some of its biggest investments.
Could buying Berkshire stock still set you up for life? Absolutely. In fact, there are two reasons to remain excited over the long term.
1. Berkshire needs fresh ideas for its growing cash pile
The stock has been one of the best-performing investments of all time, posting double-digit percentage annual returns for decades at a time. While it hasn't been a major drain on returns yet, Berkshire's growing cash pile will increasingly become a problem when it comes to matching the market's returns.
It's hard enough to beat the market year after year. It's even harder to do when a significant amount of your capital is tied up in cash. With a market cap of around $1 trillion, Berkshire holds nearly $350 billion in cash, a company record.
Fortunately, Buffett's investment team is ready for the challenge. How do we know? Without them, it's possible that nearly half of Berkshire's valuation would be tied up in cash right now.
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Key Data Points
In 2016, management made an unlikely move: It purchased shares of Apple. Buffett had long avoided tech stocks like this. "I know as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz [a Polish beetle]," Buffett once said. In 2012, he claimed that he would never buy shares of Apple because he just didn't know how to value them.
Yet four years later, the company began loading up on Apple shares. Today, it's the biggest position in its publicly traded portfolio, with a value of more than $60 billion.
What changed? It wasn't Buffett, but rather two of his investing lieutenants: Todd Combs and Ted Weschler. These are the two figures widely believed to be responsible for the huge bet on Apple. It has netted Berkshire huge profits over the years, a testament to Combs' and Weschler's prowess.
With more cash than ever, Berkshire will need fresh ideas to keep its streak of high annual returns going. Fortunately, we already have evidence that the remaining team can put big money to work with fantastic results, a strongly optimistic sign for the decades to come.
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2. Berkshire's structural advantages remain in place
Berkshire is in great hands when it comes to its investment capabilities. Weschler and Combs alone are already responsible for one of the biggest and most profitable bets in company history. But what about the rest of the business? On that front, everything remains in place as well.
Perhaps the company's biggest advantage has been its organizational structure. At the core sits a portfolio of insurance businesses. While not hugely profitable, they generate a lot of investable cash. Buffett calls this excess cash "float."
Float is generated because insurance companies collect premiums on policies, but don't need to pay out that cash until a claim is filed. Decades ago, Buffett realized that this was essentially free investment capital. By investing this float, he has turned his company into what it is today.
Beyond that, Berkshire does have a publicly traded portfolio. But it also owns a long list of private businesses. Each one, Buffett stresses, operates largely autonomously. "The important thing we do with managers is to find the .400 hitters and then not tell them how to swing," he has said.
Even after Buffett steps down, none of this will change. The company will retain the same structural advantages that have fueled its huge rise over the decades. So if you own shares or are still thinking about jumping in, Berkshire Hathaway remains one of the few "buy it for life" companies.
