The next Warren Buffett walks among us
The Oracle of Omaha released his annual letter to investors on Saturday revealing that the 81-year-old investor had picked his successor. Here, Buffett attends the Allen & Company Sun Valley Conference on July 7, 2011 in Sun Valley, Idaho.
After a disappointing, predictable Oscars telecast last night, Hollywood could take a master class from Warren Buffett in how to create dramatic tension. The revered investor released his chatty, highly anticipated annual shareholder letter on Saturday, and from its very first words, it tackled a subject that has been the source of much speculation: Who will succeed the 81-year-old Oracle in running Berkshire Hathaway? The stakes are significant: Berkshire Hathaway, a conglomerate that owns everything from insurance to jewelry to shares of Coca-Cola, is largely opaque to the outside world but so valuable that each of its shares trades at around $120,000. A mild 1 percent tick upward or downward can create a gain or loss for an investor of $1,200. That's real money. And it's a big image to shoulder. While Buffett himself has something of an unconventional life, he treasures his folksy, squeaky-clean image as one of the most apparently honorable men in the markets. Buffett also neatly sidestepped a lurking question about his taste in successors after his former protege David Sokol fell into an insider-trading scandal last year. Berkshire Hathaway's audit committee accused Sokol of violating the company's standards by improperly trading on his position at Berkshire, by buying shares of a company named Lubrizol before he handed the company's name to Buffett as a potential acquisition target. (When a merger is announced, the target usually benefits from a pumped-up stock price.) Today, Buffett said that Sokol was never going to be his successor anyway. Revisionist history, or truth? Only the Oracle knows. Here's where the dramatic tension comes in. Buffett doesn't want to just give the house away. He won't name his successor just yet. He has rejected the idea of having a "crown prince" in place, for good reason: No sooner would that man be named, than the press, colleagues and investors would lay siege to him, comb his life for clues to his brilliance, ready to place their blind faith in all of his pronouncements. The crown prince may not be ready for that kind of attention -- and Buffett may not yet be ready to give it up. So it's time to play 20 questions, Buffett-style. Here's how Buffett starts his annual report -- with a shoutout to his two new hires, Todd Combs and Ted Wechsler. Both have backgrounds in the hedge fund world, which is one that treasures privacy and disdains transparency. Here's how Buffett introduces them:
From that, it seems like the mystery is solved: surely the successor is either Wechsler or Combs, right? Buffett, the master dramatist, adds some mystery to the equation:
As 2011 started, Todd Combs joined us as an investment manager, and shortly after yearend Ted Weschler came aboard. Both of these men have outstanding investment skills and a deep commitment to Berkshire. Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.
This opens up the discussion again. The phrase "equally enthusiastic" indicates that the next Berkshire CEO will not be either Wechsler or Combs, capable investment managers though they may be. In fact, it appears that the pair may be third in line, if the two back-up candidates pan out. The role of the two managers is to pick investing candidates; while these portfolio-manager jobs are two of the most powerful positions in the investing world, they are not the same as the CEO, who oversees the operations of the entire company. And we know that Buffett, while he plans to stick around, also prides himself on giving his successor a "running start."
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.
Yes, yes...but the identity of the successor will still loom large in the public imagination. Buffett continued his game of 20 questions on CNBC on Monday, saying that the new CEO candidate is not a member of Berkshire's board of directors. We also know from Buffett's previous comments that his successor is not a member of his family. Howard Buffett, his son, will be non-executive chairman if Warren Buffett dies. Howard Buffett said last year that his father's inner circle includes several Berkshire executives: Gregory Abel, a 12-year veteran of the company who took over MidAmerican Energy Holdings after Sokol left in disgrace; Tony Nicely who runs Geico; Ajit Jain, who runs reinsurance; and Matthew Rose, the former head of the Burlington Northern Santa Fe railroad. All seem like plausible successors. But are they? Buffett's dramatic masterstroke was his revelation on CNBC today that although the new CEO had already been picked by Berkshire Hathaway's board a while ago, that person is in the dark about his own status. That's not a succession plan, that's a thriller. Like The Matrix or something out of Shakespeare, some lucky executive will emerge from obscurity and metaphorical rags to take his place atop capitalism's most impressive empire. And when that person is announced, everyone will kick themselves for not having noticed his promise and smarts from the beginning -- much as happened with Buffett himself. And that, actually, is the biggest running start that Buffett is giving his successor. Buffett isn't just granting him an enormous company to run. He's granting the successor his very own story of mysterious yet promising beginnings: a creation myth. That may be the best way to ease his path into running one of the world's most storied companies.
More than 98 percent 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 caliber 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.