Why Buffett's Successors Won't Be as Good as Buffett

Richard Beales of breakingviews.com writes about Berkshire's (BRK.A) post-Buffett future:

Other big units are important too, including the Mid-American electricity business run by David Sokol and Greg Abel. And of course the post-Buffett investing team will matter, as well. But with Buffett planning to separate the top executive and investing jobs he currently fills, both roles seem certain to be narrower in the future.

That raises separate issues as to whether the Berkshire investing-operating hybrid structure - which Buffett and long-time investing partner Charlie Munger (himself 85) have created over 40 years - can continue so successfully without them.

In my opinion there will be two big disadvantages to the fact that Buffett's role will be split after he's gone. The first is obvious: none of Buffett's successors will be as good as he is.

Second, which I don't see discussed much, is that the coordination of capital across and within the balance sheet will suffer. All corporations must decide how to deploy capital among various assets--in Buffett's case that largely means deciding whether to buy partial stakes in publicly traded companies or to buy majority control of operating businesses, or simply to hold cash equivalents. Currently the locus of that decisionmaking is Buffett's head. He doesn't have to consult with anyone. In the future, it just won't work as well when the CEO successor in charge of doing deals will have to coordinate with the CIO successor in charge of buying stocks over how to deploy assets.

Similarly, there will be coordination problems across the balance sheet, right to left. Buffett is the CEO and CIO, but he's also the chief insurance underwriting officer as well. Think of a bank: the left side of the balance sheet is in charge of making loans at attractive rates, the right side is in charge of accepting deposits at attractive rates, but what makes a loan's rate attractive depends on the rate you're paying on deposits and vice versa--that's why bankers think in terms of spreads.

An insurance company is fundamentally the same--it "borrows" money not from depositors, but from policyholders, and invests the resulting float in either operating companies, equities, bonds, or cash. I don't think Buffett has ever said so explicitly, but I believe he coordinates the price of the right side of the balance sheet with the opportunities available on the left side--he also thinks in terms of spread.

Again, all this currently goes on in Buffett's head alone, but in the future is insurance successors will have to coordinate with his investing and operating successors, and it won't work as well.

Disclosure: Long Berkshire Hathaway

Comments

[Graham and ...:]

Good summary of how Mr. Buffett works. He doesn't seem to believe that anyone can fill his shoes, so he is breaking down the job into "pieces" that individuals can manage. Then you run the risk of the old parable, the six blind people and the elephant, where no one sees the whole picture.

May 06 02:15 PM

[Ricard:]

Perhaps I read too much about Buffett, but IMHO this analysis is obvious. Despite my admiration for what he has accomplished, I have steered clear of BRKA. There is simply too much of a Buffett premium attached to the stock.

Has anyone thought of the possibility that Gates would ultimately manage the firm through liquidation? Maybe it is not too far fetched...

May 06 02:26 PM

[prairiedog555:]

Weather you believe it or not, NOBODY can fill Warren's shoes. He has been given such cult status that it would be impossible. Not impossible to better his performance, but to reach that icon level for generations.
His fund will absolutely fall when he departs.

May 07 09:34 AM