Successor Gregory Abel faces challenges as Berkshire Hathaway transitions
Warren Buffett was 25 years old when he “retired” for the first time in 1956. Benjamin Graham, the famous stockbroker who hired him, closed his fund. The prophet of Omaha, as Buffett would later be known, went to Nebraska. His break from work was brief; He soon established his own investment partnership. But in 1969, at the age of 38, Buffett retired for the second time, telling investors that he was “not adapted to this market environment” and that he would therefore close his fund. His attention turned to Berkshire Hathaway, the textile company he controlled. It has since become one of the greatest successes in business history.
Buffett, 95, will retire for the third and possibly last time on New Year’s Eve. He will resign as CEO of America’s ninth most valuable and unique company. Berkshire is a financial giant. It is America’s second-largest property and liability insurer and holds approximately US$700 billion ($1.04 trillion) worth of tradable stocks, bonds and cash. It is also an industrial community. Berkshire controls nearly 200 companies, including BNSF, one of four “class 1” railroads in America; a collection of energy services; and consumer brands, from Brooks running shoes to See’s candies. And this is a capitalist religion. 1934 edition Security AnalysisBenjamin Graham and David Dodd’s textbook is his bible. The sermons are delivered by Buffett at Berkshire’s shareholder conference each year.
It’s hard to imagine a more difficult action to follow. Expansive, similar and fraternal, Berkshire is a unique company that has long revolved around its sole boss. It has been hugely successful: Since Buffett took control of Berkshire in the 1960s, its shares have generated returns far greater than America’s S&P 500 index. Therefore, the transition to his anointed successor, Gregory Abel, will be closely watched. Can Buffett’s creation continue to thrive after he steps aside?
America’s most respected company is also one of its least understood. Berkshire is known, first and foremost, as the vehicle of Buffett’s investment genius. He is a “value” investor insofar as he began his career scanning the markets for companies worth less than the accounting value of their assets. But he also owned a lot of “growth” stocks. His purchases of Apple shares between 2016 and 2018 were among the most profitable investments in Berkshire’s history.
Buffett dislikes both terms. But one investment jargon he doesn’t talk enough about is “moats”; it is a competitive advantage that allows a business to consistently earn a rate of return above its cost of capital. Buffett’s ability to spot them is one reason for Berkshire’s outstanding performance. Some moats are bestowed primarily on consumers’ tastes, as in the case of Apple (in which Berkshire owns US$65 billion worth of shares) or Coca-Cola (US$28 billion). Others, such as Bank of America ($32 billion) or Moody’s ($13 billion), are at least partially ceded by regulations. Berkshire owns parts of America’s leading credit card providers Visa ($3 billion) and Mastercard ($2 billion), as well as a fifth of American Express ($58 billion).
But perhaps Buffett’s biggest innovation is not allocating capital, but increasing it. In 1967, Berkshire acquired National Indemnity, a Nebraska insurance company. It provides most of Berkshire’s capital, along with GEICO, an auto insurer, and a major reinsurer. The idea is simple. Before insurers pay compensation to policyholders, policyholders pay premiums to insurers. When an insurance company operates profitably, collecting more in premiums than it pays out in claims and costs, it can invest those premiums and pocket the returns. Most insurance companies park them in bonds. Private equity life insurers are now experimenting with purchasing higher-yielding private debt. But unusually, half of Berkshire’s insurance arm’s holdings are invested in a concentrated stock portfolio.
Underwriting profits from Berkshire’s insurance business make up a small and variable portion of the company’s profitability, but premiums collected have financed some large deals. BNSF was first owned by National Indemnity before becoming a direct subsidiary of Berkshire in 2023. A quarter of Occidental Petroleum, owned by Berkshire, also belongs to the insurer.
Another source of capital that Buffett has mastered is retail investors. Berkshire’s annual meeting is a celebration of middle-class capitalists admiring each other. It’s the exact opposite of the gambling-adjacent retail trading that drives markets today, but it’s almost as much fun. Berkshire’s 2015 rally began with a video of Buffett pretending to box with Floyd Mayweather. There are also newspaper throwing contests (even though Buffett eliminated print publications from his portfolio in 2020).
Berkshire now has many imitators. Bill Ackman, a brash hedge fund manager, says he is building his own version at Howard Hughes, a real estate company in which his fund owns half. So what will the future of the original look like without its legendary leader? Abel, Buffett’s successor who now runs Berkshire’s non-insurance operations, is not a stock picker. Instead, he came up with Berkshire’s energy business. That makes it troubling when Todd Combs, one of Buffett’s top investment aides, moved to JPMorgan Chase, America’s largest bank, in December.
Berkshire’s record as a corporate operator is more patchy than its performance as an investor. Since its acquisition by Berkshire in 2010, BNSF’s profit margins have been disappointing. In 2013, Berkshire teamed up with private equity firm 3G Capital to buy soup maker Heinz and later merged it with processed cheese supplier Kraft. There was a disasterand in September, Kraft-Heinz said it would split in two. Berkshire takes a no-holds-barred approach to corporate control without seeking synergies among its subsidiaries.
Abel’s skills as an investor will soon be put to the test. As interest rates fall, the cost of not working Berkshire’s $380 billion cash pile increases. Berkshire could buy another railroad (although BNSF publicly opposes it) ongoing binding between Union Pacific and Norfolk Southern). A bid may also be made for Chubb, another insurance company in which Berkshire currently owns an 8 percent stake. New investments in utilities or Japanese trading houses, Abel’s specialty, are more likely.
Berkshire’s pile of cash will also be useful in catching bargains if markets crash, as some fear they might soon. Even then, without Buffett, their authority would be diminished. “What you’re going to lose is his Rolodex,” says Brian Meredith of investment bank UBS. Would Berkshire be asked to stabilize failing banks as it did in 2008?
Abel could start returning cash to shareholders instead. Berkshire’s current high valuation precludes share buybacks under its own rules, and it hasn’t paid a dividend since 1967. Doing this now would be another step towards becoming a more typical company. Berkshire recently appointed its first general counsel; More financial disclosure under Abel also seems likely. Buffett’s annual letters were frank about Berkshire’s performance and capitalism in general, but light on the numbers.
Change will be slow but sure. Lawrence Cunningham of George Washington University thinks it will give loyal holders of Berkshire’s super-voting “Class A” shares time to adjust to Abel. Buffett will remain chairman of Berkshire’s board of directors, along with his family and friends. But increasing institutional ownership of Berkshire’s “Class B” shares and the possibility that Buffett’s shares will convert to B shares after his physical departure make a transition to more ordinary management inevitable. It would be a logical end to a remarkable career.
Economist
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