Wed, 29 May 2013
Despite a runup in its share price, Berkshire still trades at a discount and offers great opportunities to protect and grow capital over time, says BBH's Tim Hartch.
Shannon Zimmerman: Let me ask you about another company that's kind of at the other end of the spectrum and one that value investors might more often expect to see in a portfolio and has a value-focused portfolio in terms of the strategy, Berkshire Hathaway. It's the number-one holding in BBH Core Select. How do you use Berkshire Hathaway? Do you buy it like any other security? Do you buy when the valuation profile and fundamentals appear to you to be out of sync, or do you use it in a way to monetize cash holdings until you have other ideas that are more compelling?
Tim Hartch: We view Berkshire as an operating business and a holding company of other operating businesses and don't distinguish between that business. We wouldn't just use it as a holding place for cash. We view it as a business to make an investment with an objective of meeting our two goals, one is to protect the capital and the other is to grow it over time on an absolute basis.
And, that's why we're owning Berkshire, and it has some phenomenal insurance businesses. The numbers have been strong recently, and they have a great capital allocator who is using that cash flow to buy business like Burlington Northern.
Both [Warren Buffett and Charlie Munger] are good. So, I think it's obviously run somewhat differently and there is something of a cult following. But at its core, it has phenomenal operating businesses and then a very skilled capital allocator who can use that cash and make future investments with it. So, we think there is a still a discount there even though the share price has moved up meaningfully.
Zimmerman: So, let's talk a little bit about Berkshire, just beyond how you are using it in your portfolio, and the question of succession always comes up this time every year. And you take a look at something at a company like Apple and what has happened there, and they seem to be firing on all cylinders. But yeah there have been some stumbles that have caused the stock price to fall precipitously since Steve Jobs unfortunately passed away and was succeeded. What about Berkshire Hathaway? What kind of person needs to succeed Buffett in order for the company not to experience something on the lines of what Apple has experienced?
Hartch: I think the key to Berkshire is that Buffett is preparing very carefully with the board of directors for succession. We expect that he will remain for a number of years, and it'll be a very sad day when Warren Buffett steps down as the CEO of Berkshire. But I think he's very focused on this issue. He has obviously hired two very capable investors who can help allocate the capital like he has done over the last 40-plus years, and hopefully they will able to do so for a significant time period going forward very effectively. They may not be able to replicate his extraordinary performance, but with a very, very capable performance. He's tried to organize some of the businesses in a way that it's easier for them to be operated, and I think he is very focused on retaining the culture because that's what makes Berkshire special.
So we think often it is culture and people who are critical to helping a very good business remain a very good business, and I think that's what he is focused on. So, I don't have any insight into who his successor will be, but I think it's something that he and the board, that's their key priority at this point--putting that in place to enable Berkshire to thrive for the next 50 years.