May 7, 2009
Reason No. 846 why celebrity isn't all sunshine and suck-ups: Your mortality is a public topic, no more sacred than what dress Cameron Diaz will wear to the Oscars.
We saw this on the Fool's annual trip to Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) annual meeting last weekend (see more of our thoughts here). We felt terrible for the 78-year-old Buffett. He had to sit there and calmly talk about how his company would do after he died. And Buffett being Buffett, he didn't seem to care. Since Berkshire is his legacy, he really does hope his holding period is forever.
With Buffett's tacit forgiveness, three of us Berkshire-owning Fools discussed the topic further.
What happens to Berkshire stock after Buffett is gone?
Ilan Moscovitz, Motley Fool editor: This is a pretty insignificant question that investors often ask. The guy is a spry 78-year-old and probably has many years ahead of him. During our Sunday press conference, Munger, who is 85, joked that sometimes he thinks his purpose at these meetings is to remind everyone that Buffett could have at least another 7 good years left: "Warren once said what he wants said at his funeral is 'This is the oldest [expletive] corpse I have ever seen.'" The stock is already priced as if he wasn't leading the company, so we're just talking about market timing on an event that will probably happen within 5-15 years and everyone else already knows about. In my view, it's silly to speculate on tomorrow's daily stock price movement, much less for a day an indeterminate number of years down the road.
Morgan Housel, Motley Fool writer: It's pretty obvious that plenty of Berkshire investors will wet their pants and sell their shares immediately when Buffett dies. In 2000, a (completely false) rumor was spread on a Yahoo! message board that Buffett was sick and in the hospital; shares immediately fell 5%, which is pretty impressive for a rumor started in a forum notorious for baseless fearmongering. (You can see the actual board post here.)
What's also pretty obvious is that the sell-off will be spectacularly overdone when it does come. Maybe a group of value-investing diehards will be there to scoop up shares in honor of Buffett's "greedy when others are fearful" philosophy.
Anand Chokkavelu, Motley Fool editor: Buffett gets a lot of credit as a shrewd evaluator of stocks, but he also appears to be a shrewd evaluator of talent. His hands-off style demands high managerial competence. All that talent (frequently the founders of the companies he bought out) will still be there after Buffett, but over time the company will lose the effects of the competitive advantage that is the greatest investor and capital allocator of our lifetimes. I own Berkshire Hathaway because I have faith in Buffett and I realize he gets premium terms on deals because of his sterling reputation. I don't know what it would do on a short-term basis, but I believe a sans-Buffett Berkshire will be a weaker company and I believe the stock will be priced lower on a long-term basis.
Buffett claims he's not even the most important Berkshire employee. The 57-year-old Ajit Jain runs much of Berkshire's reinsurance operations, pricing exotic insurance contracts on events like natural disasters, the Final Four being canceled entirely, or the mortality rate increasing by 125% in 2010 (all real examples!). Buffett says: "I'm not needed. Ajit is needed." Further, he says, Jain is one-of-a-kind and won't be replaced (i.e. a large portion of Berkshire's operations will one day cease). Thoughts?
Ilan Moscovitz, Motley Fool editor: Well, Buffett is the most important Berkshire employee. But people often forget that Berkshire is much more than Buffett -- it's a collection of high-moat companies he's bought over the years. Remember that one of his acquisition criteria is "able and honest management." That's because after buying these businesses, Buffett has little to do with the day-to-day operations of most Berkshire companies. That gives him a competitive advantage in acquisitions, because managers know he won't pester them, and it allows him to concentrate on his most important role, which is to allocate the cash flows they generate. He's right about Ajit -- the guy is absolutely brilliant.
Morgan Housel, Motley Fool writer: I can see how Jain's departure would be worse than Buffett's. Jain has his finger on day-to-day operations, whereas Buffett's sole role is allocating capital to new investments. In other words, Jain's departure would affect Berkshire in its current form, while Buffett's departure would only impact what it has the potential to become. As far as Jain being irreplaceable: well, he's still young, thankfully. We're all going to die someday; it's probably not something you should waste a lot of time thinking about when you're young.
Anand Chokkavelu, Motley Fool editor: Berkshire Hathaway is Warren Buffett. Ajit Jain is a huge contributor, but Buffett's just being modest when he claims he's replaceable but Jain isn't.
Should a post-Buffett Berkshire be split up?
Ilan Moscovitz, Motley Fool editor: My heavens, no! Berkshire companies get enormous competitive advantages from being a part of that empire: They get financial stability, access to a AAA credit rating, and owners with a long time horizon that enable them to make investments for the long term, while competitors often feel that they have to sacrifice sanity for quarterly targets. That's an enormous advantage in a market where companies like AIG (NYSE: AIG) and Bank of America (NYSE: BAC) have gotten tripped up taking shortsighted risks they didn't understand. Buffett's often called Berkshire his "painting." Well, as a creation, it has its own value, beyond the presence of its creator. You don't destroy Guernica just because we're "post-Picasso."
Morgan Housel, Motley Fool writer: I don't think it should. Plenty of companies achieved their best days well after their iconic leaders passed on. Wal-Mart (NYSE: WMT) increased sales tenfold after Sam Walton died. ExxonMobil (NYSE: XOM) (formerly Standard Oil of New Jersey) exploded after John D. Rockefeller died. You could say both achieved success thanks to broader societal trends, but a lot of their long-lasting prosperity was a function of a unique culture and efficient business model that stuck around long after their founders passed away.
There's no reason to think the culture and business model that's brought Berkshire so much success will die when Buffett does, especially if Berkshire insiders replace him -- which they will. That's likely why Charlie Munger recently stated, "The best days of Berkshire are ahead. This company will make a big contribution to its surrounding civilization."
Anand Chokkavelu, Motley Fool editor: Yes. I know it goes against Buffett's wishes for the company and I realize that Berkshire's secret sauce is taking the insurance float and investing it better than any other insurance company, but I keep looking to what happened to another large conglomerate with a large finance arm: General Electric (NYSE: GE). The problems at GE Capital nearly brought down all its businesses and forced the company to accept help from the government. Berkshire's reinsurance business is largely a black box. Look at AIG for what can happen to black boxes. The risk is worth the reward as long as Buffett's there, peering into the black box. After that, I believe the risk is no longer worth the reward and Berkshire should be split up. Begin hate mail now.Related Links
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