Warren Buffett and his one-time partner Charlie Munger created something very special as they built Berkshire Hathaway (BRK.A 1.57%) (BRK.B 1.42%) into a Wall Street icon. However, Munger passed away in late 2023, and Buffett is not a young man. It seems highly likely that there will be a new chief executive officer at the helm of Berkshire Hathaway at some point in the next 10 years. If you own this stock, or are considering buying it, you need to consider what happens after the Oracle of Omaha leaves the stage.
Warren Buffett's unique approach
The thing about Warren Buffett is that he's not your typical CEO. He didn't work his way up in an operating company, learning how to run a business and beating out his peers to advance to the top job. He has spent the vast majority of his life as an investor. And, more to the point, he ran Berkshire Hathaway as an investor.
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To summarize what that means, he tends to buy or invest in well run companies when 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 just checks in to make sure the business is still performing well. He's more of a mentor to the management teams running the businesses Berkshire Hathaway owns rather than anything else. He only gets involved if there's a good reason to do so. That's a very unique approach to running a company.
It also dramatically increases the number of businesses that Berkshire Hathaway can own and invest in. There's no particular need for specialization at the top levels of Berkshire Hathaway because specialists can be hired to run the individual companies. That is why the company's businesses range from insurance to trains to manufacturing to retail. And that's just a very brief list. In some ways it is probably better to think of Berkshire Hathaway as a mutual fund. You are, in effect, hiring Warren Buffett to invest for you.
Berkshire Hathaway: Things are going to change sooner rather than later
Concerns about succession planning have been an issue for Berkshire Hathaway for a long time. Warren Buffett is 93 years old, and it makes sense for investors to consider what happens next.
For example, Buffett likes to sit on 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 on it, with another $153 billion in short-term investments. Buffett has proven he will be careful in the way he invests that money, but will the next CEO be as disciplined?
From a different angle, Buffett likes stocks that pay dividends, but he doesn't like to pay dividends. So Berkshire Hathaway currently has no dividend. With so much cash on the balance sheet, will the company start to pay a dividend after Buffett steps down?
Buffett is very hands off with the investments Berkshire Hathaway has made. That has worked out very well so far for investors. Will the next CEO be as willing to give free rein to the people running the individual companies Berkshire owns?
Meanwhile, there is a hugely diverse portfolio of businesses contained within Berkshire Hathaway. Is that portfolio going to stay in place, or will the next CEO look to pare down the conglomerate by selling or spinning off businesses? That could effectively change the entire reason many investors own the stock in the first place.
And then there's the really big question: Can the next CEO invest as well as Warren Buffett? If not, then the future won't be nearly as bright for Berkshire Hathaway. That's not to suggest that the company as it stands will be unable to produce strong financial results. But part of the cachet of Berkshire Hathaway is that it continues to buy companies over time. It seems highly likely that Buffett will help to train his successor, but that's not a guarantee that he will be able to pass along his investment wisdom.
This is an increasingly important topic, because Berkshire Hathaway is so large, with a market cap of more than $895 billion. Simple math requires it to make big investments to move the needle. In other words, if a new CEO made a mistake it could be a very big one. And don't forget that even Buffett makes mistakes. He recently highlighted the error he made when he invested in Paramount (NASDAQ: PARA), explaining 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 might be less magnanimous if his successor goofs up.
There are no easy answers
Anybody who has been investing for a few years knows that investing is not easy. It is a constant balancing act between risk and reward. At this point Berkshire Hathaway is still the same company that Warren Buffett built, but in the next decade it will likely be under the control of someone else. If you own it, or are considering buying it, you will need to pay very close attention to how this company is run under a different leadership team. Buffett is unique and he will be a very hard act to follow.
