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Buffett's Succession Plan Should Have Little Downside

Jeremy Glaser
Greggory Warren, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're gearing up for the 2013 Berkshire Hathaway Annual Meeting. I'm here with Gregg Warren. He's one of our Berkshire analysts. We're going to look at succession planning, which has been one of the big questions surrounding Berkshire stock. Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So have we had any update on who's going to take over for Warren Buffett from the last time we had this discussion about a year ago?

Warren: There has not really been any update. I mean, last year they came out and basically said, the board and Warren have come to an agreement on who the candidate is, the person that they've decided should replace Warren in case he passes or decides to retire, and that they put that name in an envelope and they put it in the drawer. And that's really all we've heard. There is speculation about who it could be. 

Our bet is that it's probably Ajit Jain, who runs Berkshire Reinsurance. And just based on how Buffett has talked about Jain in the past, the fact that he points out that Jain has made tons of money for the firm, probably a lot more money than Buffett has over the years, the fact that he has a very firm understanding of risk and risk management, it sort of makes him kind of the ideal candidate in our minds for this capital-allocator-in-chief sort of role that Buffett wants to pass on to the next CEO. That doesn't mean that there aren't other people within the organization that could step into that role. We’ve got Tony Nicely over at GEICO. You've got Tad Montross at General Re, Matt Rose over at BNSF, and then Greg Abel at MidAmerican, just to name a few that could easily be put into that role should Jain decide not to take it or he is not the top candidate.

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Glaser: So that's for the CEO position, but Buffett did want to kind of split up his role a little bit and has tried to pass the investment hat on. We've seen a lot of moves by his new investment lieutenants. Can you talk about those moves this year, and if anything there surprised you?

Warren: Yeah, when they came out I think it was five or six years ago and talked about splitting up the three different roles that Warren takes on--that being chairman, chief executive, and then sort of this chief investment officer--they always had in mind this idea of hiring maybe two to three different portfolio managers from the outside to handle sort of the investment portfolio, which is primarily the equity investments, to some extent also fixed income.

What we've seen over the last couple of years is, Todd Combs has come in, I think that was late 2010. Ted Weschler was hired on third quarter of 2011. And at this point it looks like these are going to be the two guys. There's not really been a whole lot of talk about going out and finding another hire. In fact, as of the first quarter of this year when they released the annual report back in February, Buffett was talking about the fact that both men are now working with a bank of about $4 billion each. That's equivalent to what Lou Simpson was working with when he was at GEICO. So in our mind, that speaks to sort of the confidence level he has in these two guys.

When you look at how they’ve been doing, their performance has been pretty good; a lot of positives about it last year at the annual meeting. We expect it was pretty good this past year, as well. We also feel that they've probably been a lot more involved in some of these non-traditional investment activities that Berkshire has been doing. We know that Weschler was involved in some of the Media General stuff that was going on on the debt financing side, and we wouldn’t really be surprised to hear that they were involved in the Heinz deal recently.

Glaser: So when you look at their equity holdings, does their strategy seem very similar to Buffett's, or have they been somewhat carving their own path?

Warren: Well, it's interesting. When you talk to some of the people who are in the know, basically Combs is sort of like Charlie Munger, and Weschler is a little bit more like Buffett. That's sort of the indication we've got as far as how they approach their investments. Combs also tends to be trading a lot more heavily in the portfolio. He is willing to take gains and move positions out of the portfolio completely, and that kind of runs contrary to what we've seen traditionally with Berkshire, where they basically bought a stock and it stayed in the portfolio for a very, very long time. I think if that's any sort of indication as where we are going forward, I think you'll probably see a lot more trading activity than we have in the past. It doesn't mean that they won't buy and hold securities or build up large positions.

Glaser: Now that we are starting to see the investment managers operate independently, do you have any sense of if having the CEO role and [the investment role] split is going to be a potential downside for the company? Were there any special synergies there having Buffett run both?

Warren: Not really. I think the way in which they've sort of set it out is pretty good. I mean, you've got the chairman role, which most people think is going to be Howard Buffett, Warren's son, more sort of an overseer of what's going on within the organization, not necessarily involved in any of the day-to-day business, and definitely not involved in sort of the capital allocation decisions overall on a day-to-day basis. And if Howard doesn't meld into that role, there is also the argument that Bill Gates could potentially fill that position because of the amount of Berkshire stock that's in the Bill & Melinda Gates Foundation, and the fact that he has been on the board for a number of years now and pretty much knows Berkshire as well as anybody.

From the CEO role, again, Buffett talks about that being a capital-allocator-in-chief position, and he always talks about that working with the investment guys. So the investment guys are going to be doing their own thing, but at that same time, they are also going to be helping the CEO and vice versa. So it's more of a collaborative role. So we don't really see it being much of a downside. You've got the two managers really focused in on, say, the equity portfolio overall, but they are also going to be involved in some of the allocation decisions on the capital that comes up through the ranks.

Glaser: Gregg, thanks for your thoughts today.

Warren: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.