Warren Buffett and his former partner Charlie Munger created something very special while building it Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) into a Wall Street icon. However, Munger passed away at the end of 2023 and Buffett is not a young man. It seems very likely that a new CEO will be at the helm of Berkshire Hathaway sometime in the next decade. If you own or are considering buying these stocks, you should consider what happens after the Oracle of Omaha leaves the stage.
Warren Buffett’s unique approach
The thing about Warren Buffett is that he is not the typical CEO. He didn’t work his way up in an operating company, where he learned how to run a business and beat his peers to rise to the top position. He spent the vast majority of his life as an investor. And, most importantly, he led Berkshire Hathaway as an investor.
To summarize what that means: He tends to buy or invest in well-managed companies if they are reasonably priced. But he doesn’t actually step in to run a company he buys; he leaves the management team in place and simply checks in to make sure the company is still performing well. He’s more of a mentor to the management teams that run the companies Berkshire Hathaway owns than anything else. He only takes action if there is a good reason for it. That’s a very unique approach to running a business.
It also dramatically increases the number of companies Berkshire Hathaway can own and invest in. There is no particular need for specialization at Berkshire Hathaway’s top levels, as specialists can be hired to run the individual businesses. That is why the company’s activities range from insurance to trains, manufacturing and retail. And that’s just a very short list. In some ways, it’s probably better to think of Berkshire Hathaway as a mutual fund. You’re essentially hiring Warren Buffett to invest for you.
Berkshire Hathaway: Things will change sooner or later
Concerns about succession planning have long been an issue for Berkshire Hathaway. Warren Buffett is 93 years old and it makes sense for investors to think about what will happen next.
For example, Buffett likes to wait for cash until he finds something worth buying. At the end of the first quarter of 2024, Berkshire Hathaway’s balance sheet had nearly $29 billion in cash, with another $153 billion in short-term investments. Buffett has proven that he will be careful in how he invests that money, but will the next CEO be just as disciplined?
From another angle, Buffett likes stocks that pay dividends, but he doesn’t like paying dividends. Berkshire Hathaway currently has no dividend. With so much cash on the balance sheet, will the company start paying a dividend after Buffett steps down?
Buffett is very cautious about the investments that Berkshire Hathaway has made. That has worked out very well for investors so far. Will the next CEO be as willing to give free rein to the people who run the individual companies Berkshire owns?
Meanwhile, Berkshire Hathaway consists of an extremely diverse portfolio of companies. Will that portfolio stay in place, or will the next CEO try to shrink the conglomerate by selling or divesting businesses? That could effectively change the entire reason why many investors own stocks.
And then there’s the big question: can the next CEO invest as well as Warren Buffett? If not, the future won’t be nearly as bright for Berkshire Hathaway. That’s not to say the company won’t be able to deliver strong financial results in its current form. But part of Berkshire Hathaway’s cachet is that it continues to buy companies over time. It seems highly likely that Buffett will help train his successor, but that’s no guarantee he’ll be able to pass on his investing wisdom.
This is an increasingly important topic because Berkshire Hathaway is so big, with a market cap of over $895 billion. Simple math requires big investments to move the needle. In other words, when a new CEO makes a mistake, it can be a big one. And remember, even Buffett makes mistakes. He recently highlighted the mistake he made when he invested in Decisive (NASDAQ: PARA), which explains that Berkshire Hathaway lost quite a bit of money on the trade. Investors are willing to give Buffett the benefit of the doubt when he makes mistakes, given his long and successful track record. Wall Street could be less magnanimous if his successor makes a mistake.
There are no easy answers
Anyone who has been investing for a few years knows that investing is not easy. It’s a constant balancing act between risk and reward. Right now, Berkshire Hathaway is still the same company that Warren Buffett built, but in the next decade it will likely be under someone else’s control. If you own the company or are considering buying it, you should pay close attention to how this company is run under a different leadership team. Buffett is unique and it will be difficult to follow him.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Where will Berkshire Hathaway be in ten years? was originally published by The Motley Fool
