The retirement, announced at Berkshire’s annual shareholders’ meeting earlier this year, will see vice-chairman Gregory Abel assume operational control on January 1. Buffett, now 95, has said he will still come to the office and will remain chairman of the board. But his exit from day-to-day leadership marks the end of a six-decade chapter that reshaped American capitalism and turned a struggling textile maker into a sprawling financial colossus.
Today, Berkshire is America’s ninth-most-valuable company. It is the country’s second-largest property and liability insurer, with tradeable stocks, bonds and cash worth nearly $700 billion. It also controls about 200 operating businesses, including BNSF, one of America’s four “class 1” railroads, a vast utilities portfolio and consumer brands ranging from Brooks running shoes to See’s Candies. It is, as much as anything, a capitalist religion, with annual sermons delivered by Buffett at Berkshire’s shareholder meeting in Omaha.
The Buffett method
Berkshire is often seen as a monument to Buffett’s investing genius, though he has long resisted easy labels. He began as a classic value investor, hunting for companies trading below the accounting value of their assets, but went on to make some of the most lucrative growth bets of modern times, most notably Apple, purchased between 2016 and 2018 and now Berkshire’s most profitable investment.
One concept he embraced enthusiastically was “moats”, durable competitive advantages that allow businesses to earn returns above their cost of capital. Berkshire owns Apple stock worth about $65 billion and Coca-Cola worth $28 billion, both beneficiaries of consumer loyalty. Other moats are reinforced by regulation: Bank of America ($32 billion), Moody’s ($13 billion), and stakes in Visa ($3 billion), Mastercard ($2 billion) and American Express, of which Berkshire owns about a fifth, valued at $58 billion.
Perhaps Buffett’s greatest innovation, however, lay not in allocating capital but in raising it. The purchase of National Indemnity in 1967, followed by GEICO and a large reinsurance operation, gave Berkshire a powerful engine of “float”, which are premiums collected before claims are paid. While underwriting profits are volatile, the float has funded some of Berkshire’s biggest deals, from BNSF to the quarter stake in Occidental Petroleum.
What changes without Buffett?
The succession to Abel will be closely watched. Unlike Buffett, Abel is not known as a stock-picker, having risen through Berkshire’s energy business. That makes the December departure of Todd Combs, one of Buffett’s key investment lieutenants, to JPMorgan Chase a concern for some investors.
Berkshire’s record as an operator of companies is also uneven. BNSF’s profit margins have disappointed since its acquisition, and the Kraft-Heinz deal with 3G Capital, once a bold bet on cost-cutting, has ended badly, with the company announcing a split in September. Berkshire’s hands-off approach, which avoids forcing synergies between subsidiaries, has been a defining feature under Buffett.
Abel will soon face difficult capital-allocation decisions. As interest rates fall, the opportunity cost of Berkshire’s $380 billion cash pile rises. The company could pursue another large acquisition, possibly in insurance, where it already owns an 8% stake in Chubb, or expand further into utilities or Japanese trading houses, areas where Abel has experience, The Economist noted. That cash hoard would also position Berkshire to act if markets crash, though even then its influence may be diminished.
A more ordinary Berkshire?
Another option is returning cash to shareholders, according to The Economist. Berkshire has not paid a dividend since 1967, and its own valuation rules limit buybacks at current prices. Introducing dividends, appointing its first general counsel, as it recently has, and expanding financial disclosure would all move Berkshire toward more conventional corporate governance.
Buffett’s annual letters, celebrated for their candour and moral clarity, were often light on numbers. Under Abel, more disclosure seems likely. Rising institutional ownership of Berkshire’s “class B” shares, and the eventual conversion of Buffett’s stake, point toward a more typical governance structure over time, according to The Economist.
The man and the manual
Buffett leaves behind more than a company. He leaves a philosophy shaped by patience, restraint and enjoyment of the work itself. “I have a lot of fun doing what I do every day,” he said in 1999. “You better enjoy it as you go along… the trick is to enjoy what you’re doing that day.”
He has often credited luck, being born when and where he was, and spoken candidly about early mistakes, from his first stock purchase at 11 to the pinball machines he placed in Omaha barber shops as a teenager. He has also been blunt about wealth and responsibility. “Leave your kids enough money that they could do anything, but not enough so they could do nothing,” he said in 1992.
Last month, he accelerated the dispersal of Berkshire stock to foundations set up by his three children, totalling about $1.3bn. In his Thanksgiving letter, he reminded readers: “Kindness is costless but also priceless.”
Today, Berkshire stands on the eve of a historic handover. The office, the routines and much of the philosophy remain. What departs tomorrow is the singular force that bound them together, and the certainty that came with it.
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