Source : THE AGE NEWS
When Warren Buffett told shareholders at Saturday’s Berkshire Hathaway annual meeting that he would step down as chief executive by the end of the year, he was effectively announcing the end of an era. No matter how well qualified his successor Greg Abel might be, Buffett is unique and irreplaceable.
For decades an increasing number of Buffett acolytes have made the pilgrimage to Nebraska to hear pearls of investing wisdom from the “Sage of Omaha”. Some of the tens of thousands from around the world who attended on Saturday slept overnight to get prime positions at what has been described as “Woodstock for Capitalists”.
Warren Buffett has been a contrarian investor, often sitting on the markets’ sidelines for considerable periods while waiting for opportunities.Credit: Bloomberg
Beyond the folksy image, humility, conspicuously modest lifestyle and endlessly quoted aphorisms that are part of the Buffett legend, is an investing genius. Alongside his former sidekick and business partner, the late Charlie Munger, Buffett popularised the value investing he was taught by Benjamin Graham at Columbia Business School.
Indeed, so successful has Buffett been – over 60 years he has generated returns of about 5.5 million per cent, against the S&P 500’s 39,054 per cent, or an annual average return of about 19.9 per cent versus 10.4 per cent – that he will leave a challenging, perhaps impossible, legacy for Abel to try to build on. Buffett is currently the world’s fifth-richest person, with a personal fortune of $US169 billion, according to Bloomberg.
Buffett has always followed a two-pronged strategy, buying companies and their cash flows and then investing surplus cash in shares and bonds.
Berkshire Hathaway is a unique combination of a private equity firm, a hedge fund and an asset manager, with success over decades helping to encourage a host of emulators that now compete for the same assets and investments that Berkshire Hathaway targets.
Buffett credits Munger with telling him to “forget what you know about buying fair businesses at wonderful prices; instead buy wonderful businesses at fair prices”.
That was great advice at the time, but the explosion in investors trying to pursue the same or similar strategies in an era of relatively cheap money and leveraged investment means the definition of a fair price has shifted dramatically higher.
Not surprisingly, for more than two years, instead of using the torrents of cash his group has generated to buy expensive companies or shares, Buffett has been building a stockpile of cash. Berkshire Hathaway now has a hoard of $US347.7 billion (about $540 billion).
For Abel, how and when he deploys that cash will represent the major and reputation-defining challenge of his new role.
Buffett’s successor Greg Abel has been handed a poisoned chalice.Credit: Getty
Abel is an operational guy, brought into Berkshire Hathaway when it acquired a stake in MidAmerican Energy in 1999. He built the energy business into a key pillar of the group’s operating assets and now runs all Berkshire Hathaway’s non-insurance operations, a portfolio of more than 180 operating companies that generated $US47.4 billion of Berkshire Hathaway’s $US89.7 billion of first-quarter revenues.
He’s a manager, not an investor. Todd Combs and Ted Weschler are the executives responsible for identifying investment targets. Once he replaces Buffett, however, it is Abel who will have to make the big calls.
Buffett has been a contrarian investor, often sitting on the markets’ sidelines for considerable periods while waiting for opportunities – the “straw hats in winter” or counter-cyclical approach that hardcore value investors pursue.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Buffett has said to explain his philosophy.
In 2008, during the global financial crisis, that strategy was vindicated. Berkshire Hathaway stepped in during the worst of the crisis to buy cheap stakes in companies like Goldman Sachs, General Electric and Dow Chemical, driving very hard bargains in exchange for the calming influence its money and Buffett’s reputation provided.
Those sorts of opportunities don’t, however, come that often.
Since the crisis, Buffett has been relatively quiet. Berkshire Hathaway’s level of out-performance of the market has shrunk and its store of undeployed cash has soared, signalling that Buffett believes there isn’t value in the market for either companies or shares in the current environment. His major play in recent years, unusually for a group largely focused on the US, has been the $US23.5 billion the group has invested in five of Japan’s biggest trading houses.
Abel’s challenge will be to find value and the moment to use that cash on deals that are large enough to move the dial in what is now a $US1.2 trillion conglomerate.
The big long-term holdings within Berkshire Hathaway’s investment portfolio are companies like Amex, Coca-Cola, Bank of America and Apple.Credit: Bloomberg
If Donald Trump’s trade policies – his tariffs – were to push the US economy into recession, which is possible, that moment might arise.
There is a lot of leverage in the US system. During the near meltdown in the US bond market earlier this year after Trump made his “Liberation Day” announcement of reciprocal tariffs, hedge funds were scrambling to exit leveraged trades and the market for leveraged loans froze.
There are a lot of highly-leveraged hedge funds and private equity firms out there that would be stressed if economic conditions deteriorated markedly, or interest rates were to rise – or both, if Trump induces, as some fear, a stagflationary recession.
‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.’
Warren Buffett
Buffett seems confident that those sorts of distressed asset sales will eventuate.
“We will be bombarded with offerings that we’ll be glad we had the cash for,” he said at the weekend.
That could release a lot of the kinds of hard assets that private equity targets and Buffett have always liked: companies with good management, strong franchises, protective “moats” and solid cashflows and earnings.
The big long-term holdings within Berkshire Hathaway’s investment portfolio are companies like Amex, Coca-Cola, Bank of America and, while he was late to that party, Apple, but the core portfolio of operating companies is centred on insurance, utilities and energy, railroads, and a collection of manufacturers and retailers.
Whether those sorts of companies that have generally performed well in the past 60 years will generate similar performance in the future is an open question.
Artificial intelligence is expected to transform companies and industries in ways that are difficult to predict.
For decades an increasing number of Buffett acolytes have made the pilgrimage to Omaha, Nebraska, to hear pearls of investing wisdom from the “Sage of Omaha”.Credit: AP
Buffett’s philosophy was to avoid companies and technologies he didn’t understand, so he didn’t invest in companies like Google, Amazon, Meta, Microsoft and only started investing in Apple – the star of the portfolio – in early 2016, nine years after Steve Jobs launched the first iPhone and transformed a company now worth more than $US3 trillion.
Abel will have to navigate the implications of AI for the post-Buffett investment environment if he is to continue Berkshire Hathaway’s history of significant out-performance. Buffett could get away with a year or two of passivity or the odd poor investment; Abel won’t be afforded that same level of shareholders’ trust.
There will be pressure on him to do something big with Berkshire Hathaway’s cash – big enough to have an impact on the group’s returns – and there won’t be tolerance for any mistakes.
In many respects, Buffett has handed his successor a poisoned chalice.
No one could deliver the Buffett package of extraordinary returns wrapped around his unique style and charisma – a personality cult that developed over decades – in an investing environment so different, and vastly more competitive, than when Buffett was mopping up hard assets at discounts to their book values, let alone their market values.
Abel may have to chart a new and different course for Berkshire Hathaway, as anyone who succeeded the man who created one of the world’s biggest and most influential investment firms would have had to do.
Buffett, his decades of investment wisdom, and his ability to see value where no one else had are irreplaceable.
There is now a significant question mark over the eventual fate of the sprawling investment conglomerate he created that Abel, even while the counsel of the 94-year-old Buffett is still available, will find it very difficult to dispel.
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