The weekend of April 30, 2011 was an exciting one! I spent the weekend in Omaha, Nebraska at the Berkshire Hathaway Annual Shareholder meeting with Warren Buffett himself! Here are some of my favorite and biggest takeaways from the event.
Yesterday we talked about Berkshire Hathaway’s dividend policy, which is a forward looking discussion of Berkshire’s ability to generate a strong return. None of that will be possible, however, unless Berkshire Hathaway has strong leaders.
Berkshire Hathaway was built almost single handedly by Warren Buffet starting in the 1960s. When he returned to Omaha from school in New York, he managed the investments of his friends and family and used the capital dollars to build the company we have all come to know today.
Over time, his company grew and he added other staff, most notably Charlie Munger. The company now employs about twenty people in its main office on Farnahm Street in Omaha, Nebraska.
Warren Buffet is 80 years old. Charlie Munger is 87. These two brilliant men have led Berkshire Hathaway’s investment and acquisition portfolio to create unrivaled returns and value for long time investors.
They are old. They will not live forever.
It was long presumed that the next CEO of Berkshire Hathaway would be David Sokol, a Berkshire Hathaway manager that joined during the MidAmerican Energy Holdings acquisition. He was then put in charge of the turnaround of NetJets, another Berkshire company.
Sokol’s name hit the headlines in March, 2011 for his involvement in what appears to be an insider trade involving the acquisition of Lubrizol. He has since resigned from his position at Berkshire Hathaway and is under investigation by the SEC.
Warren Buffet is the Chairman and CEO of Berkshire, but those are big shoes to fill. At the annual meeting on Saturday, Buffet announced that the roles of Chairman and CEO would be split.
The next Chairman of Berkshire Hathaway will be Howard Buffet, Warren’s oldest son. Howard has been involved in the business for some time and is currently a Director for Berkshire Hathaway and Coca Cola. His past business experience and lifetime dedication to the company make him a prime candidate to succeed his father as Chairman. However, he does not have the operational knowledge and experience, in my opinion, to take over the CEO role as well. Warren agrees.
No one knows who will be next in line to helm one of the largest companies in the world. I imagine the current CEO of BNSF Railway, Matthew Rose, has a good shot. It is hard to know for sure today, which does leave some room for speculation.
Who do you think is next in line at Berkshire to be the CEO? Do you think Howard Buffet is a good choice for Chairman? Please share your thoughts in the comments.
Disclosure: I own shares of Berkshire Hathaway in my active and retirement portfolios.
This year, I made my second annual pilgrimage to Omaha to see Warren Buffet and Charlie Munger discuss the future of Berkshire Hathaway. This week is Berkshire Hathaway Week at Narrow Bridge Finance. I will discuss a major topic from the meeting each day for the rest of the week.
As a shareholder, I am interested to see how the company is being managed as I would like my investment to increase in value. As a lifetime learner, I am fascinated to see how the third richest man in the world amassed such a large fortune and led his company to growth that consistently beat the index and created many millionaires.
One question Warren Buffet and Charlie Munger answered related to Berkshire Hathaway’s dividend policy. The company has never paid a dividend and, until the recent purchase of Burlington Northern Santa Fe Railway, had never split. The stock has just increased in value every single year, except for two, since the company’s inception.
Buffet said that he feels strongly about the company’s dividend policy. Every year, the company’s managers work hard to allocate capital to projects that will return more than one dollar in book value per share for each dollar invested.
This is a fantastic concept and the core of Warren Buffet’s, and his well known teacher Benjamin Graham’s, investment strategy.
Value investing is designed to find an investment opportunity, find the intrinsic value of the company inclusive of growth prospects, and compare the intrinsic value to the price of an investment. If the company is undervalued, you invest. If it is overvalued, you don’t.
Buffet said that the company continues to find investment opportunities that create a great return for shareholders. The recent high profile purchases of Burlington Northern Santa Fe Railway and Lubrizol are proof of the continued drive to increase value. The BNSF takeover has outperformed expectations and has created a major cash stream for the company.
A less understood, but incredibly large, portion of the company is invested in insurance. General RE and other segments require a strong capital structure to produce historically high returns, but must be liquid in case the cash is needed, as was the case with the recent Christchurch, New Zealand and Japanese earthquakes.
Over time, however, the portfolio companies generate cash that has to be used for something. It will either be used to invest or must be returned to the shareholders.
Buffet said that the stream of large investment opportunities will not last forever. Some companies are too big to incorporate and others are too small to be worthwhile for such a large company. The sweet spot in the middle is difficult to come by, and the number of opportunities is decreasing.
With that in mind, Buffet said that Berkshire Hathaway would inevitably have to pay a dividend some day. If the company cannot find an investment worth more than a dollar, it is better to return the dollar to the shareholders.
He hopes that day is far away, but it will come some day. He expects that the stock will drop when that day comes, as it is an admission by the managers that they can no longer perform to the levels of the past.
My Take on It
Buffet had a sad tone in his voice when he admitted that opportunities would inevitably dry up, but I have faith that there is a long enough runway that we will not see this situation come up in the near future.
Photo by mitbbs2008