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Succession: Who's on Berkshire's Bench?

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. We'd like to wish Warren Buffett a happy birthday today. He turns 80. This is obviously a day that's hopefully a good day for Warren, but it's a day that Berkshire shareholders might reflect a little bit on some of the succession issues for Berkshire Hathaway.

Here with me to offer his take is Morningstar's Paul Larson. He is an equity strategist and editor of Morningstar StockInvestor newsletter. Thanks for joining me, Paul.

Paul Larson: Glad to be here.

Stipp: So, 80 years old, he looks very vibrant at the Berkshire Hathaway shareholders meetings. We hope that he is around for a good long time. But obviously, at some point succession will become an important issue. There's been some recent news, on succession. Can you just give a recap of what's happened recently, and some of the names that have come up and what you're seeing in that area?

Larson: Right. There has been a bit of news. One piece of news that just happened within the last couple of days is Lou Simpson announced that he was retiring. And Lou Simpson, he is 73, and he ran the investments at GEICO for the greater part of three decades, and Berkshire bought GEICO--the entirety of GEICO--in the mid '90s. And ever since that point, Lou Simpson was one that was penciled in to be the next CEO of Berkshire Hathaway, should anything have happened to Warren Buffett.

Well, nothing has happened to Buffett, so there was no need for the bench player, but now this bench player Lou Simpson is retiring, and so this may speed up some of the succession planning.

Stipp: So, there was another name that also came up into the news recently, as someone who could potentially fill that role on the investment side. Who was that? And what is the feeling out there on this person?

Larson: Right. Well, you mentioned the investment side. It is worth backing up and giving some context that when Buffett does move away from Berkshire Hathaway they are going to split his role into two. There is going to be one CEO who is going to handle the operations, all the Berkshire businesses that they own, the Burlington Northern Railroad, the MidAmerican Energy utility, GEICO Insurance--these are all going to report up to the CEO, and that is rumor to be David Sokol, who is currently at MidAmerican Energy, the utility.

And then there is going to be a separate role that is going to be held by one or multiple people that is going to be the chief investment officer.

Now, recently there was some news in the Wall Street Journal that a name actually percolated up, and this is unusual because we haven't had actual names recently, and the name was someone by the name of Li Lu, a Chinese-American investor. And his history is quite interesting because he grew up an orphan in China, experienced a Tiananmen Square, fled the country following Tiananmen Square, wrote a book about his experience, went to Columbia, made some money from his book, got an education, started his own hedge fund, had a very successful track record.

And the reason he was associated with Berkshire Hathaway, or how he got associated with Berkshire Hathaway, was he was the one that introduced Buffett and Munger to the BYD opportunity that they invested in China. BYD being the battery maker, that's based in China.

Stipp: So, very interesting to see that name come up. So, obviously still there isn't any certainty about the name that we're going to see. But Buffett and Munger in the past have talked about what they would be looking for--the qualities they would be looking for. What sorts of things did they say, without naming names because they didn't name any names, what sorts of things are they looking for to fill those roles?

Larson: Right. Well, one, they are looking for someone who is independently wealthy, so that they wouldn't necessarily need the job of Berkshire Hathaway, that they would do it out of a passion for investment and not necessarily to extract maximum value from the job.

Another thing that they are looking for is someone who is fairly young. They've said in the past it doesn't make a whole lot of sense for a lot of other corporations in America to bring in a CEO who is at the very tail end of their career, maybe a 55 or 60 year old CEO who is there for five or six years, cashes their paycheck, and then retires. They want someone who is fairly young, so they can have a multi-decade track record and experience in running Berkshire Hathaway.

And of course, they want someone with a good investment track record. And Li Lu, the Chinese-American we mentioned, certainly fits all those characteristics to a T.

Stipp: Last question for you, Paul. You're an investor in Berkshire Hathaway. As you are looking at these names and thinking about, it could be this person, this person has got a pretty good chance of doing it, are there any red flags that go out for you, any green flags? How much are you keying in on this name, and how much do you think it's going to be a concern for Berkshire shareholders when that time does come?

Larson: Right. Well, no matter who would actually ends up being, I would just point out that succession and choosing an investment CIO is probably the most important decision in Warren Buffett's life, and I don't think he's going to screw it up, I think he is going to put a whole lot of thought into it, and whoever he is going to pick is likely to be a very good selection.

Stipp: Well, Paul, thanks so much for your insights today. And I'm sure you'd join me in wishing Warren a happy birthday, happy number 80.

Larson: Indeed, happy birthday, Warren.

Stipp: From Morningstar, I am Jason Stipp. Thanks for watching.