Skip to Content
Berkshire Coverage

What Questions Should Be Asked of Berkshire This Year?

Morningstar's Gregg Warren, who will be on the analyst panel at this year's meeting, details the questions he hopes Buffett and Munger will address.

Mentioned: , , , , , , , , ,

The main focus of  Berkshire Hathaway's (BRK.A) (BRK.B) annual meeting is the question-and-answer segment that Warren Buffett and Charlie Munger hold, where the two men have for a number of years fielded questions from a trio of financial journalists and from shareholders themselves (via a lottery). Starting in 2012, Berkshire included in the Q&A segment a panel of three sell-side insurance analysts who cover the company's stock. 

The analyst panel remains in place, but has been tweaked in subsequent years to include just one insurance analyst from the sell-side--which is Jay Gelb of Barclays this year--one generalist analyst from the buy-side--with Jonathan Brandt of Ruane, Cunniff & Goldfarb, the investment firm behind the  Sequoia (SEQUX) fund, returning this year--and what was supposed to be an analyst/investor who is bearish on Berkshire. As Buffett was unable to find an "accredited bear" this year, an invitation was extended to Morningstar in its capacity as an independent research firm. We continue to favor the inclusion of the analyst panel in the Q&A segment (and not just for purely selfish reasons), as we believe that it helps to focus the discussion during the meeting on more company-specific topics.

While we reserve the right to hold some of our questions closer to the vest, as we are likely to get six to eight questions in during the Q&A segment. As we need to have a bevy of questions ready in the event that other panelists (or shareholders) touch on topics we are hoping to address, we thought we would preview some of the questions that are likely to be brought up this year.

Future Acquisitions and Investments 
Acquisitions have historically been a major part of Berkshire's business and value creation, a trend that we expect to continue. Given that the company has a meaningful amount of cash on its balance sheet, which is currently generating near-zero return, we believe it is imperative that Berkshire puts capital to work in more profitable investment opportunities. Furthermore, as the firm grows ever larger, acquisitions will need to be large enough to move the needle in terms of maintaining a lower cash position overall, as well as being additive to profitability.

  • With the equity markets trading at/near their all-time highs (which has an impact on valuations for both publicly traded and private companies) where are you seeing the most value right now?
  • Do you expect to keep diversifying away from insurance, and is the trend of acquiring more cyclical businesses (like BNSF, MidAmerican, Marmon, and Lubrizol) going to continue?
  • Do you still prefer acquiring privately held business over public companies? Are there more or fewer private owners looking to sell their businesses now that the economy has stabilized? Are private companies large enough to move the needle for a firm as big as Berkshire?
  • Do you expect future acquisitions to be more like the Heinz deal, where Berkshire lent its name and capital to the transaction rather than taking the lead position from an equity perspective?
  • Do you expect bolt-on deals, which were meaningful in 2013, to become more prominent in the years ahead, limiting the amount of cash that works its way up to Berkshire for reinvestment?
  • Given the difficulties that you (or your successors) may face finding deals that not only add value but are also large enough to be meaningful, should Berkshire be broken up at some point?

Investment Portfolio, Style and Responsibilities 
The investment portfolio in Berkshire's insurance operations is rather substantial, composed of $115.5 billion of equities, $42.6 billion of cash and cash equivalents, $28.8 billion of fixed-income securities, and $12.3 billion of other investments, which include the preferred stock of Wrigley,  Dow Chemical (DOW), and  Bank of America (BAC), as well as the warrants to purchase Bank of America's common stock. The company's investment in Heinz, which includes a 50% equity stake in the now-private firm, as well as $8 billion worth of 8% preferred stock, is accounted for on the equity method, but still remains an important investment for the firm. 

Since Buffett started to transfer responsibilities for the investment portfolio over to his two lieutenants (Ted Weschler and Todd Combs) the two have gone from managing around $3 billion each in early 2012 to managing more than $7 billion each earlier this year. While this represents just 10% of Berkshire's equity portfolio, we feel that it does not reflect the contribution that both men have made to the firm in just the past couple of years--more than we had even envisioned a few short years ago. Their investment performance, from what we can tell, has also been pretty good since they came on board, and we believe that Buffett has also included the two managers in some of Berkshire's nontraditional investments lately, like the firm's dealing with Media General, as well as the partnership with 3G Capital to purchase Heinz. That said, what their full responsibilities end up being, and how much flexibility they ultimately have with the large legacy positions that Berkshire holds in names like  Wells Fargo (WFC),  Coca-Cola (KO), American Express (AXP), and  IBM (IBM) remains to be seen.

  • From an individual-style perspective, we've heard that Combs is more like Munger and that Weschler is more like Buffett. Can you point to instances where this is the case, and perhaps highlight areas where your investment styles might differ?
  • Based on reports we've seen in the papers over the past couple of years, it looks like both Weschler and Combs have been involved in transactions at Berkshire that go beyond the scope of portfolio management. What roles to you expect the two men to fill longer-term, and how much will those responsibilities overlap with the capital-allocator-in-chief role that the next CEO is expected to fill?
  • As Combs' and Weschler's responsibilities continue to grow and evolve, do you foresee a time (before you retire) when they will be managing the entire insurance portfolio? Will they be allowed to touch large legacy positions like Wells Fargo, Coca-Cola, American Express, and IBM?
  • What inferences can we make about Berkshire's decision to abstain from the vote on Coca-Cola's controversial equity compensation plan, even though Buffett is on the record saying that the plan was excessive? Is this a sign that Berkshire will be less confrontational than it has been in the past with management teams (with the best example of this type of intervention being Buffett's push to keep Coke from buying Quaker Oats, the maker of Gatorade, back in 2000)?
  • How should investors think about the tax liability that is embedded in the large unrealized capital gains that currently in its stock portfolio? Should those be deducted from Berkshire’s valuation?
  • Berkshire has been willing to take a nontraditional approach in some of its investment decisions of late, partnering with 3G Capital to buy Heinz and swapping assets with both  Phillips 66 (PSX) and  Graham Holdings (GHC) in tax-advantaged deals. Should we expect more deals like this, given that the markets are trading at/near all-time highs and Berkshire's portfolio chock full of holdings with meaningful unrealized capital gains?

Excess Cash on the Balance Sheet
Berkshire's sizable cash position continues to grow through the normal course of its business, and despite making investments and funding acquisitions through the course of the past two years the firm still closed out 2012 and 2013 with more than $45 billion in cash and cash equivalents on its books. While Buffett does like to keep $20 billion on hand as a backstop for the insurance business, which we believe is prudent, the firm is still carrying more than $20 billion in excess cash, earning relatively little in an environment of historically low interest rates. If the firm cannot find a better use for the cash, we believe that Buffett should rethink his policy of retaining all of Berkshire's earnings and perhaps pay out a one-time dividend. While Buffett laid out his thinking on (as well as his opposition to) a dividend in last year's annual letter, we expect questions on his thinking during this year's meeting.

  • In the past, you've alluded to keeping around $20 billion in cash on hand as a backstop for the insurance business. What is the level of cash Berkshire should feel comfortable holding beyond that level? In your view, how much excess cash does the company currently have?
  • Is it better for investors to think about this excess cash as being allocated to potential future deals--or to use a private-equity phrase, as "dry powder"--rather than as capital that can readily be returned to investors? And, if so, what is the opportunity cost to Berkshire and its shareholders for keeping so much cash on hand?
  • Critics argue that with Berkshire's large cash balances earning near zero returns in a historically low interest rate environment, and the firm having trouble allocating all of its excess cash into value- enhancing deals, that the firm should return the capital to shareholders. While Berkshire does have a share repurchase program in place, the stock is nowhere near the levels that would satisfy Berkshire's repurchase criteria. Although your thoughts on dividends are fairly well known, should Berkshire reconsider its policy of retaining all of its earnings and perhaps pay a one-time dividend? Couldn't Berkshire institute a dividend in order to soak up some of the excess cash flow even if most of the cash can be used for profitable investments?
  • What factors went into the decision to finally repurchase shares of Berkshire Hathaway? Does this signal to investors a relative lack of alternative investment opportunities?

Succession Planning
With Buffett turning 84 later this year, and Munger passing his 90th birthday at the beginning of 2014, succession has become an increasingly important concern for long-term investors. Buffett has stated that he wants his three roles--chairman, CEO, and investment manager--to be split upon his retirement from the firm. He has previously announced that his son, Howard, would likely become nonexecutive chairman, and we gained a little more clarity into the plan for the investment side of the business when Combs and Weschler were hired, with both men taking on responsibility for managing an ever-increasing portion of the portfolio. That said, questions still remain about who will step into the CEO role, with Buffett only noting that Berkshire's board of directors has a candidate in mind to replace him as chief executive, and that this person is "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire." Buffett has also noted that the board has "two superb back-up candidates" in mind, in the event that the first pick for the CEO role is not available.

  • What is the timeline for CEO succession? Will the next chief executive be named before you step down or be announced concurrently with your departure?
  • What characteristics should the ideal replacement CEO possess? What is the board doing to ensure that the three candidates you've mentioned in the past get the exposure they need to Berkshire's operating companies to handle the responsibilities of the job once you depart?
  • Will the next CEO be limited in the decisions he/she can make? Are certain actions likely to be completely off the table? Will he/she be allowed to break up the company if he/she feels it is in the best interests of shareholders?                         

Thoughts on the Economy and Regulation
While not economic prognosticators in the traditional sense, Buffett and Munger are typically probed for their opinion on the state of the U.S. and global economies. Following Buffett's well-publicized bullish stance on stocks and the U.S. economy during the depths of the financial crisis--including an editorial in The New York Times about "buying American," in mid-October 2008--the Oracle of Omaha has been solidly behind the long-term viability of the U.S. economy. Given where we are today, we'd like to see if his thesis has evolved. We would also note that many of Berkshire's noninsurance businesses are economically sensitive, and are exposed to a fair amount of regulation, so getting their take on key issues is always valuable.

  • Could you summarize your view of the current economic climate based on the results you're seeing from Berkshire's operating subsidiaries? More specifically, what are you hearing from the managers of the "Powerhouse Five"--BNSF, MidAmerican, Iscar, Lubrizol, and Marmon--that runs contrary to what we're seeing in the headlines?
  • Is the so-called reregulation of railroads the greatest threat to the industry, or is this just a perpetual threat to industry pricing power that investors have to learn to tolerate? How did you get comfortable with this dynamic before you invested in a U.S. railroad?
  • Distributed generation, a method of generating electricity on a small scale from renewable and nonrenewable energy sources, has been described as the largest threat to utilities. MEHC owns three large regulated utilities--MidAmerican, PacifiCorp, and NV Energy. Do you perceive distributed generation as a meaningful threat to the utility business model and utility moats? How will utilities need to adapt? How will MidAmerican adapt?
  • What is the more serious threat to long-term economic growth: inflation or deflation? Do you believe either of these states are enough of a concern in the near- to medium-term that investors should start taking action now to avoid a potential fallout down the road?
  • Have your expectations for inflation changed much over the past year? If so, has that change entered into your own capital allocation plans or the decision-making at Berkshire's subsidiaries?
  • How do you view the prospects for the domestic economy versus international markets? How does that view change when we split the discussion between developed and emerging markets? 

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.