Warren Buffett first bought Berkshire Hathaway shares almost 61 years ago. Dissatisfied with management, the 34-year-old took control of the ailing textile manufacturer two and a half years later and almost came to regret the decision. Two decades of failed turnaround efforts came to an endBerkshire Hathaway'S (BRKB) leaves the dying textile trade. But that was just the beginning for one of the stock market's most notorious personalities.
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Buffett turned 93 on August 30 and still runs the company. From the ashes of what he called the “terrible business I knew very little about,” Buffett built one of America's most iconic conglomerates, with a market capitalization of more than $822 billion.
Berkshire is a highly decentralized conglomerate that controls and owns all or major parts of BNSF Railway and its insurance flagship Geico, along with Pilot Travel Centers, the Borsheim jewelry chain, Dairy Queen and Pampered Chef. It also includes a small but highly regarded chocolate maker in California called See's Candies, a type of business that Buffett admires mainly because it requires little capital and throws away a lot of money.
These efforts have earned Buffett legions of fans, including longtime Berkshire shareholder Bill Smead. Smead Capital first bought shares of Berkshire in 2003, when the company had already made major acquisitions in insurance and energy. And he has since watched, somewhat in amazement, the exponential growth in both business volume and stock value.
“You don't think that something that's successful is going to stay successful for as long and become as big as Berkshire has become,” said Smead, chief investment officer at Phoenix-based Smead Capital Management.
Berkshire Hathaway to Warren Buffett
But the conglomerate faces big questions about its future. Now that Buffett is 10 years old and his second-in-command and Berkshire co-chairman Charles Munger turns 100 on January 1, restlessness is growing in the stock's ranks. Analysts and investors alike have called for greater transparency and disclosure, including on the important issue of succession.
The growing unrest could spell turmoil for the company, its shareholders and investors as a whole.
It's easy to see why. Buffett is much more than the CEO of Berkshire Hathaway. He is perhaps America's most famous, beloved and trusted investor.
Likewise, Berkshire Hathaway isn't just one of the ten largest S&P 500 companies by market cap. It is also the largest shareholder of eight S&P 500 giants, includingBank of America(BAC),Coca Cola(IS) InWestern petroleum(OXY). Moreover, it is one of the three largest institutional owners ofAppel(AAPL).
This market influence means that the wealth of most Americans' retirement nest eggs — even if it's just in a simple S&P 500 index fund — is tied in some way to Buffett's Berkshires.
For Berkshire shareholders, Buffett's loss could mean a sharp drop in the stock price, some analysts say. Many investors hold their shares in a unique way, often as a family heirloom passed down from generation to generation, and selling the shares can have major tax consequences.
For future management, the eventual loss of Buffett and Munger could bring unknown scrutiny and pressure on a wide range of issues. Calls for a breakup are sure to increase, as will debate over issues from corporate governance to Berkshire Hathaway's elusive – i.e. non-existent – stock dividend.
All this threatens in the future. At this point, the investment community would like to see the traditionally reticent company open up more about its plans for the future.
“Berkshire would be doing itself a favor by reassuring investors more forcefully and directly about what the post-Buffett process will look like,” said CFRA analyst Catherine Seifert.
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The money is piled into Berkshire Hathaway stock
Warren Buffett shows few signs of slowing down. The conglomerate he built, one company at a time, over six decades is also moving forward. It's a vehicle boosted by strong earnings and a huge cash pile that has swelled to nearly $150 billion.
In the second quarter, Berkshire Hathaway's robust profits added to cash positions and demonstrated the value of its diversified business mix, said Bill Stone, chief investment officer at Glenview Trust.
Its fortress-like cash position could make Berkshire the ultimate defensive stock.
In a market with downside risk, Berkshire shares benefit from increasing fund ownershipIBD inventory control toolshows. Shares of the Omaha, Neb.-based established company hit an all-time high on August 7, thanks to its latest earnings report.
But along with the company's cash positions, Buffett and Munger, who as Buffett's longtime friend and close business partner play a key role in the company's investment decisions, could be the moat.
Stone, a long-term shareholder, views their inevitable departure with some trepidation.
“If they leave, you lose your best players ever, so you can never feel good about that,” he told IBD.
But Stone appreciates that Berkshire has started ripping off the post-Buffett plans. These plans call for splitting Buffett's roles as chairman, CEO and brains behind the stock portfolio.
Some investors would also like to see the conglomerate broken into pieces.
Others disagree. With the right person at the top, there are “real positives” to its structure, Stone said. Smead echoed those sentiments.
Warren Buffett's succession plan at Berkshire Hathaway
In 2021, Buffett confirmed that Greg Abel, who oversees Berkshire's non-insurance business, is his designated heir, ending years of speculation.
As CEO, Abel will oversee day-to-day operations and allocate capital to dozens of companies across industries ranging from energy and utilities to insurance, rail, manufacturing, services and retail.
Berkshire Hathaway also passively owns companies through its significant stakes in publicly traded companies.
For more than a decade, Buffett has overseen the stock portfolio along with Todd Combs and Ted Weschler. Analysts who spoke to IBD expect both to remain investment managers after Buffett, although it is less clear who the stock picker will be.
They also expect Ajit Jain, who oversees the insurance and reinsurance business, to continue in this role. In the three years to 2021, Jain was seen as a potential successor to Buffett, along with Abel. Insurance is Berkshire Hathaway's largest business by revenue.
Lately, Buffett has been introducing the men who lined up to succeed him on the public stage. He confirmed in May that Abel is the right man for the job.
Yet a mystery remains. Analyst Meyer Shields at KBW said, "There's not that much we know about (Abel)."
Warren Buffett's investment strategy
Buffett's investment strategy is simple: focus on finding and buying quality companies at reasonable prices. Investors appreciate what he has delivered: a colorful collection of companies with lasting competitive advantages. It's all built on the core idea of building value over time.
Buffett's success is no coincidence. Stone links that to an "incredibly intelligent" way of structuring the company. In part, Berkshire takes advantage of hisgrowing insurance "float" to invest in the company.
Between 1965 and 2022, Berkshire Hathaway shares delivered a compound annual return of 19.8%, versus a 9.9% gain for the S&P 500, the company says.
Since the fall of 2008, Berkshire has not outperformed the S&P. Yet Buffett's track record, tenure and reputation are still widely admired.
Some names are in the same league: George Soros, Stanley Druckenmiller, Jack Welch and Harry Singleton were mentioned during interviews for this story. But even these hedge fund magnates and former CEOs fall short in breadth of expertise, according to Buffett watchers who spoke to IBD.
Stone says he has "more confidence" in Buffett and Munger than anyone else. That's partly because Buffett has said that 98% of his net worth — now an estimated $118.3 billion — is in Berkshire Hathaway stock.
That deep trust could prove an obstacle for Buffett's successors.
Analyst Stephen Biggar of Argus Research says they have won over Berkshire's boss in terms of succession. Then they have to prove themselves to investors.
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Warren Buffett is gregarious but reserved
If analysts have anything to say about Buffett, it's about his imperiousness, which makes it difficult to cover his activities.
There is no investor relations team at Berkshire Hathaway. Analysts say they are not invited to annual shareholder meetings. And the company doesn't make earnings calls, so the statements are — in Seifert's words — based on a mosaic theory of pieced together details.
Edward Jones analyst Jim Shanahan would welcome some changes at the top.
“I hope Greg Abel will think differently about dealing with analysts and the investment community,” he said.
Either way, loyalty runs deep. It's clear that some shareholders will sell Berkshire Hathaway stock if Buffett leaves.
But there are people who hitched their wagon to the company "believing that Warren was unique and that the returns he delivered over time are also unique," Shanahan said.
The analyst said it might initially appear that many of these Buffett fans would sell without the legend. But his conversations with them, their heirs and estates suggest otherwise.
“I have come to understand that many of them have become more comfortable with the sustainable qualities of the model,” he said. “And especially given fundamental considerations and other factors, they are more likely to stay invested.”
In the event of a sharp post-Buffett sell-off, Stone believes the board would "simply step in and buy back shares" if prices fell below a perceived value threshold.
Berkshire Hathaway stock and 'split' pressure
Immediately or shortly after Warren Buffett's departure, calls to dissolve the company are almost certain.
The issue of “splitting” has long plagued conglomerates. It is centered around the idea of dividing a diverse company into specialized parts, giving investors pure play. These options would individually have a greater value than the shares of the combined company, proponents argue.
A Berkshire Hathaway split would, some say, increase shareholder value while making the company simpler and easier to follow.
It's a polarizing topic. Argus Research's Biggar sees little chance of a breakthrough in Berkshire. He notes that most shareholders are in favor of the conglomeration strategy.
Smead, a former shareholder, argued that Berkshire's "beautiful format" gives both operating companies and stock pickers "great freedom" to make the decisions they believe are best for the company.
KBW analyst Shields, on the other hand, sees Berkshire's size as an obstacle to growth.
Buffett himself sees Berkshire's companies as collectively stronger, but accepts that the pressure to break up will begin the moment he dies.
"I think it's more likely that the stocks will go up," Buffett said at Berkshire's 2017 annual meeting. "If I died tonight, I think the stocks would go up tomorrow. And there would be speculation about breakups and that kind of stuff."
Greg Abel, Berkshire Hathaway in action
What kind of character would the new Berkshire have after Buffett?
Seifert said she expects CEO Abel to surround herself with the same kind of soft-spoken, capable, hard-working, decent leaders the company is known for.
She sees Buffett's norms – 'there are no corporate jets, there is no banking culture' – continuing.
But Shanahan predicts the company's famed annual shareholder meetings will become more "businesslike" and less folksy. Abel, Buffett's designated successor, is "smart and analytical" but can also come across as "cold and distant," he said. Not quite the grandfatherly Buffett image that investors know and identify with.
Abel, 61, trained as an accountant and then followed Berkshire's entry into the energy sector. Berkshire took a controlling interest in MidAmerican Energy shortly after its merger with CalEnergy in 1999. Abel took over as CEO of MidAmerican in 2008. MidAmerican became Berkshire Hathaway Energy in 2014.
Abel's role at Berkshire expanded to all non-insurance activities in 2018.
What companies does Berkshire Hathaway own?
Analysts say Abel is a telling choice to succeed as CEO of the entire conglomerate. Amid the country's energy transition, Berkshire has expanded into both fossil fuels and renewables, most notably through growing investments in Occidental Petroleum, which already owns more than 25%.
These investments were made despite Buffett and Munger's increasing uncertainty in the stock markets. In the first half of 2023, Berkshire sold $18.4 billion more worth of shares than it bought.
Ever the pragmatist, Buffett is betting that the transition to renewable energy will eventually make the remaining supply of fossil fuels more valuable. At the same time, renewable energy offers valuable tax benefits for the company.
Abel undoubtedly determines the direction. But his positions are less clear on some more controversial issues, such as nuclear energy.
KBW's Shields suggested that something about that score could be inferred from the company's "openness" to considering the social and economic consequences of less dependence on oil and gas.
Abel also loaded up on Berkshire Hathaway stock with his own money, after what some people saw as a push from Buffett. A $24.6 million purchase in March brought its Class A stock holdings to about $105 million. That's "important to recognize," Shanahan said.
Berkshire Hathaway Management Team succeeds Warren Buffett
When Abel is eventually promoted, that promotion will open up the top spot at Berkshire Hathaway Energy. It's one that could be filled by Occidental Petroleum CEO Vicki Hollub, analysts say.
Similarly, on Berkshire's insurance side, the potential departure of Jain, 72, could create an opening that would be a good fit for Joe Brandon, they add. Brandon is the current CEO of Alleghany Property and Casualty Insurance, which Berkshire acquired in 2022.
Further down the organizational chain, at subsidiaries, the talent list is more uncertain. CFRA's Seifert says Berkshire needs to address this issue immediately.
The company's reluctance regarding succession is particularly pronounced on the equity side.
Warren Buffett has long been the manager of Berkshire's stock portfolio. Stock selection, "the special sauce at Berkshire Hathaway," could be the most difficult role for Buffett to give up, Seifert says.
Combs or Weschler, Buffett's investment advisor, appear to be behind some relatively new transactions. It is believed that they bought Apple, for example. The megatech leader now accounts for more than half (51%) of Berkshire's massive stock portfolio.
The couple is also suspected of moving BerkshireAmazon.com(AMZN), as well as tech IPOsSnowflakes(SNE) InSteenCo(STNE). These three stocks together make up less than 1% of Berkshire Hathaway's portfolio.
But no one knows for sure. AndBuffett, insists“Charlie and I are not stock pickers; we are business voters,” says nothing.
Risks of Berkshire Hathaway's Stock Portfolio
Because of the large shares in Apple, some Buffett watchers warn of concentration risk. Others are surprised that the value investing legend has built such a huge position in one of the most sought-after stocks on the market.
For Shanahan, these changes have changed the way he views Berkshire Hathaway itself. “The investment portfolio feels more like a new economy,” he said, “and complements the core businesses, which are old economy.”
For some there is also disappointment. This concerns in particular the scarce information about Combs and Weschler, who manage increasingly larger parts of the $353.4 billion portfolio.
From Smead's perspective, Buffett has explained his own investing discipline as clearly as anyone has ever managed.
So he asked, “Why shouldn't we learn about his two hand-picked stock picks, especially when we know that Buffett and Munger don't have much longer in this world?”
Combs also runs Geico, which Shanahan said raises some concerns about bandwidth issues among the senior management team.
'The Warren Buffett Way' or stock price suicide?
After the reins are handed over, most analysts expect an explicit push for cultural continuity. Some rule out significant or even moderate changes, although they believe small changes are possible.
“These guys were raised the Buffett way,” said Argus analyst Biggar. “It would be suicide for Berkshire's stock price if they changed the strategy.”
Still other analysts predict internal tensions, top executive turnover and committee-style decision-making. They warn that many executives, like many shareholders, may be more loyal to Buffett than to Berkshire.
Unlike most large companies, Berkshire Hathaway enjoys what Seifert sees as a fairly "benign" and "passive" investor base because of its focus on its CEO. And while Buffett loves stocks that pay dividends, he has famously avoided paying one.
Under the new post-Buffett management, there will likely be a stronger push for dividends and regular capital returns to shareholders, she says.
Check to go beyond Warren Buffett's death
At least initially, any push for change will only go so far. The dual share class structure of Berkshire Hathaway stock gives most of the voting power to owners of Class A shares, which currently trade at nearly $550,500 each.That means, first and foremost, Buffett, which holds mainly A shares and had 30.9% of voting control a year ago.
That grip on power will extend beyond the grave. Buffett has donated his stake to foundations, but he has said donations of Berkshire stock after his death will last "more than a decade" to minimize disruption.
The donations may continue, but in an increasingly important area, Berkshire may have to save money.
While it is a leading S&P 500 company by market capitalization, it lags in environmental, social and governance (ESG), a factor that Buffett has shown great disdain for. It suggests there is a battle ahead to earn a spotESG scorecard like IBD's. Berkshire ranks 967th in the Dow Jones ESG rankings of 2,068 publicly traded companies with an overall ESG score of 47.77 out of 100 as of August 24.
“A new generation of investors will demand this of them,” Seifert said.
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