Warren Buffett will turn 83 in August, which means that according to the Social Security Administration’s period life table, the world’s greatest living investor will have a 91.3077% chance of blowing out all those candles again in 2014 – betting odds, if ever there were any. However, sooner or later, investors in Berkshire Hathaway Inc. (NYSE:BRK.A) are going to have to come to grips with the fact that one day both Buffett and Charlie Munger will be gone. (Buffett is already the fourth-oldest CEO in America. Munger is 89.)
What happens then?
A Buffett-less Berkshire
Under Buffett’s guidance, Berkshire Hathaway Inc. (NYSE:BRK.A) has gone from $8 to $162,924 a share. Today, Berkshire Hathaway Inc. (NYSE:BRK.A) is the eighth-largest public company in the world, an industrial-financial powerhouse that wholly owns GEICO, Dairy Queen, Fruit of the Loom, BNSF, Lubrizol, Iscar, Marmon Group, NetJets and Helzberg Diamonds, 75% of MidAmerican Energy, 50% of H.J. Heinz Company (NYSE:HNZ) and has significant minority holdings in American Express Company (NYSE:AXP), Wells Fargo & Co (NYSE:WFC), M&T Bank Corporation (NYSE:MTB), The Procter & Gamble Company (NYSE:PG), and International Business Machines Corp. (NYSE:IBM). In addition, Berkshire Hathaway Inc. (NYSE:BRK.A) added 26 “bolt-on” companies in 2012 to supplement its existing businesses.
While Buffett has made clear that any succession will ultimately be under the controlling influence of the Buffetts and Mungers, and that control of Berkshire Hathaway Inc. (NYSE:BRK.A) will only be awarded under the strict condition that Berkshire will continue to be run as it always has been, the fact remains that the larger Berkshire Hathaway Inc. (NYSE:BRK.A) gets, the more difficult it is for the conglomerate to consistently beat the markets. (Both Buffett and Munger have admitted as much.)
Together, these companies represent some of the best low-risk, high-margin performers in the market today. The competitive advantages of Berkshire’s component companies won’t just disappear overnight just because Buffett is gone.
One of the most admirable attributes of Buffett’s portfolio is that it essentially runs on auto-pilot. Berkshire’s “hands-off management” policy typically leaves existing management in charge of its subsidiaries’ affairs.
The real danger is that Berkshire will ultimately be a victim of its own success. In other words, the danger isn’t that the stock will plummet in the post-Buffett era, but that the collection of low-debt, high-margin companies that Buffett has collected will be a temptation that’s simply too good for Wall Street to resist borrowing money against in the global debt markets.