This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Berkshire Hathaway’s long-time chief and genius stock-picker is stepping down at the end of this year.
- Fearing his absence will undermine the conglomerate’s long-term market-beating performance, shares have struggled since the announcement was made.
- Berkshire will not only survive Buffett’s impending exit, however, but is built to thrive even when he’s gone.
It's been a not-so-great year for Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders. Long-time CEO and in-house stock-picking wizard Warren Buffett announced in May that he'd be stepping down from the role at the end of this year. Berkshire's stock has struggled ever since, down 8% from then versus the S&P 500's (SNPINDEX: ^GSPC) 18% gain. There's arguably nothing worse for a ticker's value than uncertainty, and there's certainly plenty of that surrounding this name now.
Forward-thinking investors of course know short-term setbacks like these can be long-term buying opportunities. Is that the case here, while you can still step into Berkshire's B shares for less than $500 apiece? (The A shares are currently priced at nearly $750,000 each, making them out of reach for most investors.) If you can take a step back and look at the bigger picture, yes, it's worth capitalizing on this current weakness.
A performance pedigree to be proud of
There's no denying Warren Buffett and Berkshire Hathaway are nearly synonymous. He's the chief reason Berkshire's become the massive success that it is today since he took the helm of the then-textile company back in 1970. From its early 1980 initial public offering (IPO) at a price of $290 per share, the stock's gained more than 250,000%, pumping the conglomerate's market cap up to over $1 trillion. That makes it the world's tenth-biggest company.
Perhaps more relevant to interested investors, this ticker's average annual gain of more than 15%, easily trounces the S&P 500's long-term average year gain. That's what most people fear will be going away in Buffett's absence.
And maybe it will go away.
Just because something is possible, however, doesn't make it likely. In fact, it's actually unlikely we'll start seeing a subpar performance from Berkshire shares once Buffett's no longer in charge. Here's why.
Berkshire's strength isn't just Buffett's brilliance
Having celebrity CEOs like Buffett can be a double-edged sword. Bigger-than-life personas often correlate with high-performing stocks. High-profile leaders, however, can't remain in charge forever. Once they're gone, it's not unusual for their companies to lose some of their magic. Apple's Steve Jobs and Amazon's Jeff Bezos come to mind. The organizations each formerly led are still solid investments, but there's no denying things aren't quite the same now as they were under their leadership.
These aren't quite apples-to-apples comparisons with Berkshire Hathaway though, for a couple reasons.
One of those reasons is simply how Warren Buffett has been as much of a teacher as he's been a chief executive, leaving behind 60 years' worth of instructional materials to absorb. His wisdom applies to everyone ranging from Berkshire's executives to individuals who simply want to build a bigger nest egg or achieve more success in life. His advice extends beyond the world of business too, reminding people that reputations are something that should be well protected. He also encourages investing in yourself as much as investing in the stock market.
The point is, there will be no ambiguity about how Berkshire's management team should steer the company as well as conduct themselves.
And the second reason Berkshire Hathaway's performance isn't likely to be all the different after Buffett steps down? It's the structure of the organization itself.
It's generally understood -- but underappreciated -- that there's nothing else quite like Berkshire Hathaway out there. It's a mutual fund in the sense that it owns a sizable portfolio of publicly traded stocks. Unlike most funds, however, it's not limited to a particular kind of stock, nor is it required to keep a minimum amount of money invested in the market at all times. It's also like a private equity firm in that it wholly owns a range of cash-generating businesses like insurer Geico, Duracell batteries, Dairy Queen, railroad BNSF, and Fruit of the Loom, just to name a few. But it's not looking to grow and then sell any of those businesses; as is the case with its stocks, Berkshire's favorite holding period with its privately owned companies is forever. And without the prospect of short-term shareholder pushback, the conglomerate can do what's best for these businesses in the long run even if it means short-term turbulence.
That being said, it's worth noting that once they're vetted, Buffett mostly prefers to leave the managers of Berkshire's businesses alone...which usually ends up being the smartest move. Buffett knows he doesn't know everything about every single one of the conglomerate's business lines.
Perhaps more than anything though, Berkshire's got the option of doing nothing for long stretches of time. Although it's recently earmarked just under $10 billion to wholly acquire Occidental Petroleum's chemical arm OxyChem -- Berkshire's biggest purchase in the past three years -- that's only a tiny fraction of Berkshire's current cash hoard of more than $300 billion that it's been sitting on for over a year now. Most companies would be forced to do something with that money, even if just giving a bunch of it back to shareholders in the form of a special dividend. Not Berkshire Hathaway, though. Investors seem to understand that the conglomerate is just waiting for the right opportunity to come along. And they're OK with that.
Sooner is better than later
So, yes -- most investors arguably should buy into Berkshire Hathaway's B shares while they can still be bought for less than $500 apiece. Just don't tarry if you're going to be one of those investors. The market now seems to be seeing everything discussed above, pushing shares up again following their pullback from May's peak to August's multi-month low. The Buffett news never really merited that sort of response in the first place, and now that more and more investors are realizing it, the tide's turning bullish again.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
