Who will succeed Warren Buffett?
There are 5 important things to remember when asking who will replace Warren Buffett.
- Warren Buffett will die sooner or later. (Buffett is 82 and has had prostate cancer).
- Irrespective of Buffett’s wishes, or any structure that he may have set up to determine his successor, the boards of companies (elected by shareholders) which he owns, particularly Berkshire Hathaway, will eventually make the decision.
- The replacement will probably, but not inevitably, come from within the Berkshire Hathaway family.
- Buffett’s secretary, Debbie Bosanek, has said that Buffett fulfils three roles at Berkshire Hathaway, so his job may be split among several people.
- Even if the successor is as brilliant an investor as Buffett, it will take a long time for him or her to build up and acquire the aura and appeal of a legend like Buffett.
There has been continuing speculation from media and other sources about whom Buffett has anointed as his successor. (And let us not forget that a successor will also be needed for Charlie Munger). Everybody is guessing, including us, but we think that there are clues in what he has been saying, particularly to shareholders in Berkshire Hathaway. We also do not exclude the possibility that Buffett’s roles will be split up into several positions. As we said, Buffett’s job has various facets and Buffett himself spoke cryptically about aspects of the succession plan at Berkshire that involved his “successor” and two good back-up people.
In his 2011 letter to shareholders, Buffett specifically mentioned Tod Combs and Ted Weschler as being of the next generation of financial leaders and as having “outstanding investment skills and a deep commitment to Berkshire’’ and he continually praises Ajit Jain. He has not named anyone as his successor but indicated shortly afterwards that the company had chosen his successor, again without naming him or her. He said this:
Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright. More than 98% of my net worth is in Berkshire stock, all of which will go to various philanthropies. Being so heavily concentrated in one stock defies conventional wisdom. But I’m fine with this arrangement, knowing both the quality and diversity of the businesses we own and the calibre of the people who manage them. With these assets, my successor will enjoy a running start. Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do.
When you think about it, it makes sense for Berkshire to adopt the multiple successor approach – can just one person replace Buffett?
Buffett’s possible successors
Why is Howard a possibility? Because Buffett told 60 Minutes in an interview that Howard would succeed him as Chairman of Berkshire Hathaway:
Howard Buffett is 58 years old and seems the closest of Buffett’s sons to him. Although he is a director of Berkshire, is and has been a director of Coca Cola and associated companies, and is currently the president of the Howard Buffett Foundation, his main interests appear to have been farming, politics and philanthropy. He has a 1400 acre farm in Illinois and often rides the tractor. Through his Foundation and other processes he is trying to alleviate world hunger. He says that he prefers to work outdoors.
Warren has been careful about saying whether Howard would or could fill his key role of choosing investments and suggests that Howard’s role would be as the guardian of the culture at Berkshire. He would ensure that nobody used Berkshire for their own ends rather than in the interest of shareholders. From what we have seen of Howard in interviews, he seems to agree with this.
That said, people change and so do their ideas and circumstances. The fact that Howard bears the Buffett name, and that the Buffett family would have some influence over the voting stock in the company, could see a push by Howard to replace his father.
Li Lu is a Chinese-American hedge fund manager of Himalaya Capital who does not work for Berkshire, so why is he in the mix? There are several reasons. First, he has a close connection with Charlie Munger, having helped to translate Poor Charlie’s Almanac into Chinese and having written its forward. Second, Charlie has stated that it was inevitable that Lu would become a top guy at Berkshire (Wall Street Journal, 30 July 2010). Third, Lu’s advice to Charlie and Berkshire has been good; he recommended BYD Co, which has been a big winner.
Lu’s investment principles are right out of the Buffett-Munger playbook, and he is very big on the margin of safety, as you can see from a lecture that he gave at Columbia:
For these reasons, and the fact that Warren listens a lot to Charlie, Lu must be a possibility.
Todd Combs, aged 42, investment manager with Berkshire and another former hedge fund manager, seems ideally suited to Berkshire. Buffett has said of him that: “He is a 100% fit for our culture… I can define the culture while I am here, but we want a culture that is so embedded that it doesn’t get tested when the founder of it isn’t around.’’
As we understand it, Combs came to Buffett’s notice when he wrote a letter to Charlie Munger, asking for a meeting to discuss investments. Charlie lunched with Combs and passed him on to Buffett and it has gone on from there. He has made a good start and his initial recommendations for stock purchases, including MasterCard and DG, substantially outperformed the market. Buffett said in 2012 that Combs will be given a few billion dollars to invest during the year, a seeming increase on the 1.75 billion dollars that he managed during 2011.
Buffett’s comments in the 2011 letter suggest that Combs is certainly a candidate for something big. And his casual approach to clothes is something that Warren would not find objectionable.
Weschler, 52 years old and another former hedge fund manager, joined Berkshire in January 2012, after building up a big reputation as a value stock picker. What might appeal to home town boy Buffett about Weschler is that as well as his financial acumen, Weschler has never strayed far from his base in Charlottesville, Virginia. Weschler met Buffett when he was the successful and anonymous bidder at an auction to have lunch with Buffett. We understand that the successful bid was in the order of $5 million, which may have turned out to be a cheap enough lunch for Weschler.
Weschler apparently had a big hand in the Berkshire purchase of Media General,which owns a host of rural and regional newspapers. We have to say that this purchase sounds like a typical Buffett contrarian investment – when everyone else is scrambling to get out of the print media, buying the type of newspaper that is less likely to suffer big time electronic competition that the big city dailies makes sense, particularly if the price is right.
We can see why Buffett would like Weschler other than for his business ability. He seems unaffected by the wealth that he has acquired, ran his initial investment companies with a frugal approach and, like Combs, does not big note himself. Like Buffett, Weschler is data driven.
Weschler and Combs both appear to seek value in the shares that they buy, if reports are accurate, just like Buffett and Graham, but they may differ in their trading approach; Combs is reported to trade more often that Weschler, who likes to accumulate - the purchase in DeVita for Berkshire being an example.
Weschler has been given similar responsibility to Combs and it looks like Buffett is trying to tag-team them, with their compensation based on 80 per cent of their own performance and 20 per cent on the other’s.
Who is Ajit Jain? He is an Indian born engineer with a Harvard MBA who currently runs the reinsurance business of Berkshire Hathaway. He has to be in the running to be the, or a, successor to Buffett purely because of some of the things that Buffett has said about him. In his 2010 letter to shareholders, repeated in 2011, Buffett had this to say about Jain:
Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources. Indeed, we are far more conservative than most large insurers in that respect. In the past year, Ajit has significantly increased his life reinsurance operation, developing annual premium volume of about $2 billion that will repeat for decades.
From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.
Buffett is said to have remarked that if he, Munger and Jain were adrift in a leaky row boat, Berkshire shareholders should try to save Jain first. Also, in an email, Buffett claimed that Jain was smarter than he was and has made the further comment that Jain has made more money for Berkshire than he had.
Jain’s skills lie in allocation of capital and Buffett trusts him implicitly. It is thought that Buffett was talking about Jain when he said that the leading candidate was as straight as an arrow.
Whether the fact that Jain is older than the other candidates and has more limited investment experience counts against him is not known. He is quite diffident about his chances, as he showed in an interview with the Times of India on 22 May 2011, in which he also disclosed that there were four candidates to replace Buffett, naming however only himself and David Sokol, who is no longer a candidate, having resigned from Berkshire over an insider trading scandal.
For more on Ajit Jain and his chances of taking over after Buffett dies, see our article Will Ajit Jain succeed Warren Buffett?
Other names have surfaced from time to time, including Greg Abel, manager of several Berkshire companies whom Buffett also praises to Berkshire Hathaway but less fulsomely than he does Jain, and Mathew Rose, another Berkshire manager.
Who will it be?
Nobody knows except Buffett and those closest to him. Your guess would be as good as ours but if we had to place a bet, we would go for a triumvirate with Howard Buffett as chairman, Ajit Jain as CEO and one or more of the other runners supervising investments. We may revise this opinion after the upcoming Berkshire Hathaway annual general meeting.