Here’s a theory from Charles Munger on why uncle Warren Buffett has been so successful building Berkshire Hathaway Inc. into one of the world’s most valuable companies:
“He has considerable time to consider,” Munger told investors in Los Angeles on Feb. 10. “Warren is sitting on top of a business now, and you look at his schedule sometimes, and there’s a haircut. ‘Tuesday: Haircut Day.”‘
Buffett fans have cleared their own schedules this weekend. On Saturday, Berkshire is placed to release its annual report online. As with years past, it will incorporate a lengthy letter compiled by the 85-year-old billionaire about the company, investing and other things he’s been considering. Here are a few themes to look at:
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Succession
It’s the big unanswered question at Berkshire: Who’ll follow Buffett as ceo? Investors and the business press have speculated concerning the leading candidates for a long time. But Buffett has avoided divulging any names. While it’s unlikely that’ll change, there’s always a way for an unexpected.
There are a few clues. In a letter this past year, Buffett said the board had settled on the right candidate and that, in certain respects, the person “will do a much better job” than he’s doing. Future CEOs, he added, may come in the company’s ranks and become “relatively young” so they can average at least 10 years in the helm.
Munger, Berkshire’s vice chairman, dropped a bigger hint. In a separate letter to investors this past year, he highlighted the accomplishments of two Berkshire managers: Ajit Jain and Greg Abel. Both men, Munger wrote, are types of “world-leading” executives who’re in some ways better than Buffett. Jain, 64, has run insurance operations at Berkshire since the mid-1980s. Abel, 53, manages the company’s energy unit.
Short of naming a successor, Buffett could explain much more about how the company will be organized after he’s gone. Already, he’s arranged some assistance for his successor. Todd Combs, 45, and Ted Weschler, 54, Berkshire’s two investment managers, are poised to consider responsibility for the company’s stock portfolio and advise the next CEO on deals. Howard Buffett, the billionaire’s oldest son, will probably become non-executive chairman.
Stock Portfolio
Buffett gained fame within the 1970s and 1980s as a stock picker. Using funds from Berkshire’s insurance subsidiaries, he made bets on companies like the Washington Post Co. and Coca-Cola Co. that soared in value over the following decades.
Recently, he’s had a rough go in the market. Two of his biggest investments — International Business Machines Corp. and American Express Co. – plunged during the last year as they’ve struggled to adapt to new technologies and competition. While AmEx has been a long-term winner for Berkshire, IBM trades for less than what Buffett paid. Another big investment, Wal-Mart Stores Inc., has additionally come under pressure.
Buffett could use the letter to explain why he likes the companies’ long-term prospects. He could also remind investors that Berkshire’s stock portfolio, while valued at more than $100 billion, has become less important to Berkshire’s growth. Over the past many years, he’s built more value by acquiring dozens of companies. Berkshire has interests in insurance, energy, manufacturing, media, retail and transportation.
Insurance Earnings
Buffett has long asserted Berkshire’s “core” business is insurance. It owns Geico, the second-largest auto carrier in the U.S., and several other manufacturers that sell property and casualty coverage.
Underwriting profit was down 43 per cent at Berkshire’s insurance units through the first nine months of 2015 because of higher claims costs. While Buffett has long said results from those businesses can be volatile, he’ll likely remind investors why insurance has been great for Berkshire over the five decades he’s run the company.
Everything Else
Increasingly, Berkshire’s answers are associated with a growing stable of businesses away from insurance industry. Subsidiaries include well-known consumer brands for example See’s Candies and T-shirt maker Fruit from the Loom, in addition to more-obscure operations like chemical company Lubrizol and Israeli toolmaker Iscar. Berkshire also owns electric utilities and BNSF, one of the largest U.S. railroads.
Buffett always recaps how these operations fared and often gives some predictions about how they might perform in the year ahead. BNSF, for example, spent heavily this past year to improve service but has become facing a slump in commodity prices that’s hurting demand. A greater dollar may also affect profit at Berkshire’s subsidiaries that operate away from U.S. Buffett could also weigh in on which the plunge in oil prices means for his businesses.
Acquisitions
“Berkshire is now a sprawling conglomerate, constantly trying to sprawl further,” Buffett wrote in last year’s letter. He made good on those words in 2015. In July, he joined with Jorge Paulo Lemann’s 3G Capital to invest in H.J. Heinz’s tie-up with Kraft Foods Group Inc. Per month later, Berkshire agreed to buy Precision Castparts Corp. for $37.2 billion.
Buffett is likely to give investors more information on why he bought Precision Castparts, making industrial components for that aviation and energy industries. He explained in August the deal would keep him from making another major purchase for in regards to a year. Still, he could offer an update on his search for more acquisitions and whether he’ll get together with 3G again.
Food for Thought
Some of the most-discussed passages in Buffett’s letters haven’t much related to Berkshire. That’s while he often devotes a piece to some business or investing topic that he finds interesting. Past reports have included thoughts on derivatives, investment and public pension plans.
With China’s economy slowing, a U.S. presidential election in full swing, oil prices at their lowest levels in a long time, and central banks in Japan and Europe implementing negative interest rate policies, there’s an abundance of topics he could take about this year.
A Blunder
Buffett is famous for his candor, and the letters can lead you to some sort of mea culpa. In 2015, he stated how he waited too long to sell shares in Tesco Plc. The “thumb-sucking” cost Berkshire, which posted a US$444 million loss on the investment, he wrote. Expect the billionaire to call attention some new mistake in the letter this season.
