Baby Boomer Investment Tip - Buy Berkshire

Includes: BRK.A, BRK.B
by: Travis Johnson

If you believe, as I do, that a major successful investing theme over the coming years is going to be, "follow the baby boomers," there are a lot of ways to invest.

I've talked about some of them before:

  • Boomers are going to bring a population boom in urologists' offices, so invest in Intuitive Surgical for the coming wave of prostate surgery.
  • Boomers will need to pay close attention to their money and manage their own retirement income, so invest in asset managers like Legg Mason.

But one that hasn't yet come to mind popped into my head Thursday as I was reading Warren Buffett's annual letter to shareholders (link is a pdf file):

Boomer business owners are going to have to deal with major issues in cross-generational transfers of family businesses, so that will mean great opportunities for Buffett and we should buy Berkshire Hathaway, Inc. (BRKB).

Why is that? Well, Warren Buffett has often noted, when talking about his relatively recent focus on acquiring control of operating businesses instead of buying shares of public companies, that Berkshire Hathaway has become the "buyer of choice" for private U.S. companies.

This is true for a couple reasons, but the main reason that Berkshire is the "buyer of choice" is that business owners can sell to Berkshire but still continue to manage the businesses they've nurtured - and in most cases, manage them exactly how they have always done, with the only real difference being that the income not needed for business expansion flows to Berkshire to be invested by Buffett. And of course, Berkshire pays cash.

See, Warren Buffett doesn't really want to manage your business or tell you how to do things - he just wants you to continue making money for him. In his words, Berkshire teams up (this quote relates to the Iscar deal) "with extraordinarily talented managers who could be trusted to run the business after a sale with all of the energy and dedication that they had exhibited previously." So for baby boomer mini-oligarchs who are nearing retirement and worried about how to pass on the business to their no-good, lazy kids without wrecking it, there's now a better option: See if Warren wants to buy it, and give the kids a bucket of cash instead.

The latest large Berkshire acquisition is no different, though it relates to the Israeli company Iscar instead of to a U.S. firm: Berkshire bought 80% of the company and left the family with 20%, so the family still has a firm stake in their continued success but now also has much more financial flexibility as the generations turn.

So if you're a baby boomer, maybe running about 60 years old and thinking about slowing down, what do you do with your business? (Assuming you've managed to build it up to be worth at least $5 billion, which is Buffett's sweet spot, or built it in an area where Berkshire managers could consider you an add-on acquisition, like construction materials or intimate apparel or pipeline management or, of course, insurance). Maybe you've accumulated a few (or a few thousand) employees and are worried about their futures... maybe you're not sure how to split the company up among your family... maybe you need to take some cash out of your business to build a retirement nest egg, but don't want to give up managing the business just yet.

Berkshire Hathaway is the answer for the lucky ones whose businesses have appeal for Buffett and the gang. They may not pay you what an IPO or a buyout firm would give you, but they'll make a deal in a one-hour meeting and won't strangle you with bankers' fees or drown your pride and joy in silly debt, and they'll let you continue to run the company the way you like, and they probably won't try to financially engineer all your employees out of a job.

I think that's a pretty compelling argument for the relatively large family-owned companies of the world. Even discounting any estate tax that might threaten the breakup of the company, there is plenty of hassle involved with moving assets from one generation to the next, especially operating businesses, so kind papa Warren, who can turn your business into money without turning you out on your behind, might be just the ticket.

I don't really know if this will mean significantly more success for Berkshire Hathaway as the generations turn; they've already had plenty and probably don't need a tailwind like this to succeed, but it can't hurt. The more companies Warren Buffett has to choose from in his remaining years at the helm, the better the future looks for Berkshire Hathaway shareholders.

Disclosure: I own B shares in Berkshire Hathaway, and have no plans to sell. I don't own any companies that Warren Buffett might like to buy, unfortunately.