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Warren Buffett will turn 81 years old on August 30. Rational investors are concerned with risks, no matter how morbid they may seem. Just how large is the key-man risk associated with Warren Buffett’s eventual death? What impact should we expect his death to have on the price of Berkshire Hathaway (NYSE:BRK.A) stock?

Fortunately, the recent resignation of Steve Jobs has provided a case study in how the market responds to the departure of iconic CEOs. Apple (NASDAQ:AAPL) shares dropped less than 2% upon learning that Steve Jobs had resigned as CEO. This drop occurred against at 1.5% decline in the broader market, and is remarkably mild for a response to headline news. This is a victory for proponents of market rationality.

This result can be projected onto Warren Buffett and Berkshire Hathaway. First, the perceived value associated with Warren Buffett’s leadership as a fraction of the Berkshire’s total value must be assessed relative to the perceived value of Steve Job’s leadership as a fraction of Apple’s total value. In the collective consciousness, is Warren Buffett more of Berkshire Hathaway than Steve jobs is of Apple?

This question was addressed using Google Insights for Search. Scaled search frequencies over the past 12 months for “Warren Buffett,” “Berkshire Hathaway,” “Steve Jobs,” and “AAPL” were queried. The following search ratios were calculated:

Search Terms

Scaled Searches

Steve Jobs

1221

AAPL

578

Warren Buffett

316

Berkshire Hathaway

166

Steve Jobs / AAPL

2.11

Warren Buffett / Berkshire Hathaway

1.90

Steve Jobs and Warren Buffett were both searched about twice as frequently as their respective companies.* Based on this crude assay, Steve Jobs and Warren Buffett command roughly the same mind-share relative to their companies. (If you are reading this and you have a better way of gauging relative mind-share, please comment on this article and suggest your method.)

This rough estimate indicates that a drop in Berkshire Hathaway’s share price upon Warren Buffett’s death would be similar to the drop in Apple’s share price since Steve Jobs announced his resignation. A guesstimate for Berkshire’s drop would be mild, near 2%.

Given that Mr. Buffett is an 80-year-old male living in the United States, he has a life expectancy of 7.41 more years and 7.1% chance of dying within one year.** This low probability of short-term death in conjunction with a low estimated market drop suggests that the mortality risk associated with the market reaction to Buffett’s death is negligible.

Another argument for a Buffett mortality risk is associated with the notion that Buffett produces alpha for Berkshire Hathaway that will disappear upon his death. Indeed, many investors and media commentators consider Buffett to be infallible, the human embodiment of financial truths. Apparently, they believe his past success makes him right. If this fantasy were real, then his death would be a terrible financial blow to the future returns of Berkshire Hathaway.

Fortunately, Buffett is not the Pope of finance. He makes mistakes, and is a mere mortal both in the sense that he will one day cease to live and in that he has limitations. If he sticks his finger in a cup of Coca-Cola, it doesn’t leave a dent. Moreover, past success does not guarantee future success. There are many other people with higher investment returns than Warren Buffett; we call them lottery winners. Their success does not validate the merits of playing the lottery (please don’t play the lottery) or give them credentials as investment gurus. Buffett is very skilled, but he is unlikely to repeat the past excess of his success beyond other comparably skilled, professional value investors.

Moreover, Buffett’s more recent investments do not seem to match his quoted investment philosophy. Buffett proclaims that he only invests in firms he understands, yet he has invested in complex firms like Goldman Sachs, Inc. (NYSE:GS) and Bank of America (NYSE:BAC). This is not consistent with his criterion for understanding his investments. Consider the following:

  1. Buffett has stated that complex mortgage-backed securities (MBS) are beyond human compression
  2. BAC and GS are more complicated than a single MBS
  3. Warren Buffett is human

Therefore, we must conclude that he does not understand BAC and GS.

The bottom line for Berkshire Hathaway is that Warren Buffett can be replaced by his successors. Who knows, maybe they will find cult followings of their own.

*Search terms were selected to avoid homonyms. For example, I didn’t use “Apple” to avoid counting grocery searches as part of public interest in the company. This assessment assumes that the ratios of these searches as representative of public sentiment are roughly the same. If for example, the ratio of people who misspell “Buffett” as “Buffet” to those who misspell “Berkshire Hathaway” as something else is larger than the misspelling ratio of the “Steve Jobs” and “AAPL,” then we would be underrepresenting the Mr. Buffett’s mindshare.

**Actuarial data was obtained from the 2007 Period Life Table for the Social Security Population published by the US Social Security Administration.

Disclosure: I am long AAPL.

Source: What Steve Jobs' Resignation Shows Us About Post-Buffett Berkshire Hathaway