Warren Buffett just turned 83 years old, an old age by Wall Street standards.
While it’s likely that Buffett will remain at the top of Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B) for at least a few more years, now more than ever, focus is turning to his successor. He’s hired two great portfolio managers, Ted Weschler and Todd Combs, who both beat the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) index by double digits in 2012.
The two new hires run independent portfolios worth as much as $5 billion each after Buffett upped their assets under management in 2012. But their portfolios have little effect on Berkshire’s $200 billion book value. Berkshire is still a bet on Buffett, not his successor. Just how and when will Buffett hand over the Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B) portfolio to new managers?
Signaling confidence in his picks
Warren Buffett is undoubtedly one of the greatest investors who has ever lived. His approval is worth its weight in gold — and he knows it.
During the financial crisis, Buffett bet big on Goldman Sachs at a time when the rest of America thought the banking system would crumble. Goldman Sachs paid 10% dividends on preferred stock sold to Buffett, effectively licensing his “brand” as a stamp of the bank’s quality. He later bought a railroad, Burlington Northern, when economic recovery looked lightyears away.
Then, most recently, he took a position in Bank of America, a move that sent the stock soaring. Interestingly, Buffett later added that he dreamed up the deal from his bath tub, never influenced by some crazy Excel spreadsheet or a Manhattan office building stuffed with investment bankers. When you can make deals from your Ohama bathroom and send a stock rocketing, you know you’re doing something right.
Buffett stimulated confidence in America when it seemed America’s best days had come and gone. Now he needs to instill confidence in his replacement. How can he do that?
Reloading the elephant gun
Buffett’s elephant gun is his massive cash haul generated from Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B)’s incredible annual profits and insurance float. He’s always on the hunt for elephants: big, easy-to-understand businesses that can move the needle for Berkshire.
Recently, Buffett’s made moves that will shore up many of the questions about Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B)’s future capital allocation. Burlington Northern Sante Fe requires more than a billion dollars in new investments each year. This year, a Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B) subsidiary will swallow NV Energy, Inc. (NYSE:NVE), a capital-intensive utility that will also require billions in committed capital on an ongoing basis.