Dear Warren:
Can we talk?
First, you should know that I am a huge fan of Berkshire Hathaway and have been bullish on the Class A shares, now around $290,000, since 1999. One of the high points of my 26-year career here was interviewing you in Omaha, Neb., in 2003 for a Barron's story and having lunch with you-I recall you had a BLT and a Coke.
At a modest 1.4 times book value and 22 times projected 2018 earnings, the shares continue to look appealing today. Thanks to you, Berkshire (ticker: BRK.A) is still attractive to investors.
And I love the whole show you put on: the repartee on CNBC, the droll wisdom in the yearly letter to shareholders, and the joyous carnival that is the annual meeting.
But after 53 years at the helm, isn't it time to share the limelight with your likely successor and with Berkshire's many managers? Investors would get to know them better and gain confidence that your conglomerate will be in good hands when... well, you are turning 88 in August.
Berkshire's future success hinges in large part on removing any possible doubts about the new leadership.
And you know probably better than any other investor the importance of having shareholder confidence in the chief executive. Succession can be tricky at any company, especially when the CEO has played the central role in building the business over decades. Given how revered you are globally, one has to recognize that the Berkshire succession is uniquely delicate and potentially fraught with peril.
If the succession is managed badly, Berkshire shares could drop and lead to activists calling for a breakup of your sprawling, decentralized conglomerate. Large subsidiaries like the Burlington Northern Santa Fe railroad and Geico insurance would be valuable as stand-alone companies.
At last year's annual meeting, you acknowledged as much, saying that if you died that evening, "the stock would go up tomorrow" because it would fuel speculation about a breakup.
Yes, we know that Berkshire Hathaway has a succession plan. But wouldn't it be better if we knew more about it?
The betting here and among many investors is that your successor will be Greg Abel, the chairman of Berkshire's big utility business. The Canadian-born Abel, however, is largely unknown to investors, as is the less likely contender for the top job, Ajit Jain, a 32-year Berkshire veteran who is a brilliant underwriter of complex insurance policies covering disasters like hurricanes and earthquakes. Abel and Jain were named Berkshire vice chairmen earlier this year and given greater responsibilities. Abel oversees the noninsurance operations, and Jain, the insurance businesses.
If you are not going to name your successor, shouldn't you at least showcase the top candidates and management team so that shareholders can assess their abilities?
We have some suggestions for Berkshire Hathaway that involve providing more information and greater accountability to shareholders. Now would be the ideal time to take some positive steps to cement your incredible legacy.
(Buffett, Abel, and Jain declined to comment.)
For one, some investors think that Berkshire should now elevate Abel to a clear No. 2 position in the company-perhaps as president-and let him speak at the annual meeting and possibly other forums so that shareholders and Wall Street can assess whether he is as good as you and longtime Berkshire vice chairman Charlie Munger say he is.
"The annual meeting is still the Warren and Charlie show," says David Rolfe, chief investment officer at Wedgewood Partners, a St. Louis investment firm and longtime Berkshire investor. "But no disrespect to them, wouldn't it be great to also get the probable future CEO, Greg Abel, up there onstage with them to make a presentation and take questions? This would introduce him to shareholders and allow him to find his voice. What better and more supportive environment than the shareholder meeting?"
The corny jokes and trips to Dairy Queen in Omaha aside, your job is uniquely challenging because it involves oversight of Berkshire's dozens of operating businesses with total projected earnings power this year of $22 billion, and a $190 billion equity investment portfolio. Then there are the capital-allocation decisions-whether to make acquisitions, buy stocks, return cash to shareholders-involving those earnings and Berkshire's growing cash hoard, now more than $100 billion.
There's added pressure for a successful succession because of Berkshire's size and the need to follow a legend who has personified Berkshire. The company's market value of $475 billion ranks sixth in the U.S. stock market behind only tech giants Apple, Amazon.com, Google parent Alphabet, Microsoft, and Facebook. Every action by your successor will be carefully scrutinized.
Many on Wall Street, to be sure, aren't worried about Berkshire's future.
"I have high confidence that Berkshire is positioned to do just as well in the post-Buffett era as today," says Jay Gelb, an analyst with Barclays who has an Overweight rating and a price target of $367,500 on the A shares, 27% above current levels. The more liquid Class B shares, worth 1/1,500 of the A shares, change hands at $192 each.
Berkshire won't have just new leadership, but new shareholders, too. Your 17% stake in the company, worth $80 billion, will be donated to foundations over about a dozen years after your death, and smaller stakes of longtime holders like Munger may be donated, as well.
A challenge for Berkshire, says Lawrence Cunningham, a law professor at George Washington University and author of Berkshire Beyond Buffett, will be to maintain an engaged, long-term focused shareholder base.
Here are eight steps you should take:
Hold an investor day. Abel and Jain could provide an overview of the noninsurance and insurance businesses, and there should be presentations from executives running important divisions like Burlington Northern (railroads), Geico (auto insurance), General Re (reinsurance); Berkshire Hathaway Energy (utilities), Precision Castparts (aircraft parts), Lubrizol (chemicals), and Clayton Homes (manufactured homes). Let's even hear from the head of one of your favorite subsidiaries: See's Candies.
This is how one of your favorite CEOs, Jamie Dimon of JPMorgan Chase (ticker: JPM) runs things. Dimon is confident of his top managers and showcases them at the bank's annual investor day and other events. This has instilled confidence on Wall Street about the post-Dimon leadership of JPMorgan.
Bill Gates, Microsoft co-founder and Berkshire board member, told CNBC after the annual meeting in early May that he was impressed by presentations from various Berkshire managers at a board meeting. "Why can't we, the shareholders, see that?" Rolfe of Wedgewood Partners asks.
Share the annual-letter writing. The length of your annual letter to shareholders has shrunk because you are no longer summarizing details of many operating businesses, referring shareholders to the 10-K instead. Given that, it might be a good idea to include one-page memos from important Berkshire managers like Matthew Rose, the chairman of Burlington Northern, and Tony Nicely, the longtime CEO of Geico.
Todd Combs and Ted Weschler have each managed a slice of Berkshire's equity portfolio since they were hired in 2011 and 2012, respectively. Each could write a one-pager about his investment philosophy, one or two stocks that illustrate his approach, and his performance. Your son Howard is due to succeed you as chairman. Let's hear what he has to say about what Berkshire means to him and your family.
Berkshire's shareholders are among the smartest and most engaged of any major company. You have referred to them as your business partners. They're hungry to learn more about the company that many of them cherish.
Buy back Berkshire stock. Berkshire hasn't repurchased any stock since 2012. The reason is that the company won't pay more than 1.2 times book value, which probably is significantly below what you consider to be Berkshire's intrinsic value. Raise that limit to 1.3 times book.
Consider paying a dividend. Yes, the Berkshire model has been to take profits from its insurance and other businesses and allow you to plow the money into equity investments or acquisitions. For decades, a dollar in your hands has been better than a dollar in shareholders' hands.
Over the past five years and the past 10 years, however, Berkshire shares have trailed the S&P 500 index. The shares are only slightly ahead of the index over the past 20 years. So maybe it's time to start giving something back to shareholders. Berkshire has the cash-$109 billion as of March 31-and it's piling up. Berkshire could pay a 1% dividend and still have more than 75% of its earnings available for investments.
Give more details on the investment portfolio. The underperformance of Berkshire shares may reflect a lack of winning technology stocks in Berkshire's investment portfolio-until the addition of Apple (AAPL) in 2016. Berkshire now owns $46 billion of the iPhone maker.
There have also been mistakes, including what probably was a money-losing investment in IBM (IBM) shares that totaled about $13 billion. Berkshire liquidated most of that holding last year and finished selling in the first quarter. An investment in a group of leading U.S. airlines including Southwest Airlines (LUV), Delta Air Lines (DAL), and United Continental Holdings (UAL) has been good, not spectacular.
Combs and Weschler are expected to run the entire investment portfolio after you depart. That's a big responsibility. We don't know how well they have done so far with their equity portfolios. You said at the annual meeting that both are ahead of the S&P 500 over their Berkshire tenure, but you didn't comment on recent performance. Doesn't that suggest they're behind the market lately?
Their holdings probably include Mastercard (MA), Visa (V), General Motors (GM), Davita (DVA), and Charter Communications (CHTR). Why not tell shareholders how well they're doing-and how you've done? If they can't beat the market as their portfolios grow, maybe Berkshire ought to consider indexing some of its portfolio. (Combs and Weschler didn't respond to a request for comment.)
Get more flexible with acquisitions. For all of your talk about hunting for "elephant"-size acquisitions, you have landed few large deals since purchasing Burlington Northern for about $35 billion in 2010. Berkshire's only major deal since then was the purchase of Precision Castparts for $32 billion (plus $5 billion in assumed debt) in 2016. You also paid $9 billion for Lubrizol in 2011.
Now is the time to get loose of your self-imposed fetters. Lift the prohibition against participating in corporate auctions. The boards of selling companies are understandably reluctant to approve a deal with Berkshire without entertaining other offers, especially since Berkshire usually wants to pay cash, not stock. Why is Berkshire's cash better than anyone else's? Private equity firms compete on deals and produce some hefty returns. The no-auctions policy only hobbles Berkshire.
Disclose more subsidiary financials. Berkshire doesn't release financial results for Precision Castparts and many other subsidiaries. It groups Precision Castparts in a catchall category called "manufacturing" that includes other businesses.
What do we know about Precision Castparts? Not much. Berkshire said Precision Castparts' revenue was up 6% and pre-tax earnings were off 7.5% in the first quarter of 2018, reflecting what Berkshire stated in its 10-Q was the "temporary shutdown of certain manufacturing facilities." The company didn't provide the actual earnings level, however.
You have expressed confidence in Precision's CEO, saying you would buy the company all over again. Still, Berkshire paid a full price for Precision-more than 20 times earnings. Wedgewood's Rolfe thinks that if Precision were a stand-alone public company, it might be worth less than what Berkshire paid for it.
Name Abel as your probable successor.
Abel, 56, is a more likely successor as CEO than Jain, 66, who is reserved and publicity-shy.
Abel was CEO of Berkshire Hathaway Energy from 2008 to 2018 before becoming chairman of the unit earlier this year, when he was named Berkshire vice chairman. Berkshire Hathaway Energy, with electric utility operations in the Midwest, West Coast, and Britain, would be one of the country's largest utilities with a possible market value of $50 billion if it were a stand-alone public company.
Cunningham, the George Washington University professor, notes that Abel has run a mini-Berkshire, with multiple divisions. Its headquarters staff is lean like that of Berkshire, which has just 26 people at its Omaha base. "I'd like to see Greg take a more prominent role at the annual meeting," he says.
Running Berkshire is one thing; replicating you is another matter entirely. There are some things that depend on your relationships and your global reputation. For one, a series of sweet deals over the years that benefited Berkshire might not be offered to your successor. When Goldman Sachs and General Electric wanted to raise money during the 2008 financial crisis, they turned to Berkshire in part because of the signaling effect: If Buffett is comfortable with us, we must be a safe investment.
Berkshire extracted high-rate preferred stock investments with equity warrants from General Electric and Goldman Sachs. Berkshire's most lucrative such deal probably was a $5 billion preferred-stock investment in Bank of America (BAC) in 2011 that turned into a $21 billion equity position thanks to valuable equity warrants. Bank of America probably didn't need to give away so much equity. It looks like an expensive mistake by Bank of America CEO Brian Moynihan in what otherwise has been an admirable eight-year tenure.
Likewise, it's unclear if Berkshire's valuable relationship with 3G, the Brazilian investment group, will outlive you. Berkshire owes its $20 billion stake in Kraft Heinz (KHC) to its original investment in the Heinz buyout in 2013 that was engineered by 3G.
Without you, Berkshire may amount to another big pool of capital in a world awash in it. Berkshire's recent failure to reach a deal to invest $3 billion in Uber could signal this. Uber didn't need Berkshire's money on your terms and passed on a transaction. It may take another financial crisis to give Berkshire an edge.
More structural changes may be in the offing in the post-Buffett era. One longtime investor foresees the company divided into three main operating units-insurance, utilities, and industrials-with a sizable group of smaller businesses such as Pampered Chef (a cookware vendor) spun off to shareholders.
Berkshire runs counter to the strong corporate trend of simplification and focus. There are benefits to Berkshire's approach, including an immediate ability to offset any insurance losses. But a vast, decentralized Berkshire might not last for long after you, I am sorry to say.
The way the Berkshire's board operates may need to change, as well. It met only three times in 2017, the fewest number of meetings for any company in the S&P 500 except for Envision Healthcare, according to Institutional Shareholder Services. The median number of board meetings for S&P 500 companies was seven.
What would you say in a letter to Warren Buffett? Write us at mail@barrons.com and we may publish your take. Find out more at barrons.com/mailbag.
Berkshire provides little compensation to its directors, many of whom see it as a privilege to serve with you. They get paid just $900 per meeting-the median annual S&P 500 compensation for a board member is $285,000. Berkshire also doesn't provide directors and officers insurance. Looking ahead, the board probably will need to meet more often, get compensated better, and be insured against liability. CEO pay will have to rise. You earn just $100,000 a year.
Berkshire is your baby-we get it. You took control of what was then a faltering textile company in 1965. It turned into a golden child, with its Class A shares up an astonishing 15,000-fold since.
Now, it's time to pave the way for the next generation. After all, neither one of us is getting any younger.
Sincerely,
Andrew
Julian Brigden, estrategista da Macro Intelligence Partners, recentemente apresentou alguns argumentos indicando que o FED deverá normalizar a taxa básica de juros nos mesmos moldes do que ocorrera durante o período entre 1967 e 1969. Em anexo, segue sua mais recente apresentação.
A estrategista Lyn Alden tem uma visão de mercado bem interessante. Ela está no campo dos "inflacionistas", assim como Louis-Vincent Gave, mas é mantém uma mente bem aberta para investimentos em ativos que dependem de efeitos de rede ("network effects") como as cryptomoedas.
