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More on Berkshire Hathaway March 11, 2009

Posted by shaferfinancial in Finance.
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One of the tribe’s members, Joshua, posed a question about Warren Buffett and his age.  Joshua is young and wonders if  long term Berkshire Hathaway is good for him.  I liked the question so much I chose to dedicate a whole post to it!

Joshua, I think you are asking two questions here.  First, what are the long term prospects of Berkshire Hathaway?  And secondly, what happens when Buffett bows out?

As regular readers know Berkshire Hathaway makes money in two broad ways.  First, is underwriting in the various insurance products offered.  Secondly, is by investing the float of the premiums.  Now, the remarkable story of Berkshire is based on success in both sides of that equation.  It is not talked about much, but Buffett’s long time partner Charlie Munger[age 85], is as much responsible for the success as the more well known Buffett.  The success of Berkshire is really about much more than Warren Buffett.  He also gives credit to his mentor, Graham, and his theories of finance.  Warren also talks about the managers of the businesses Berkshire owns and how remarkable they are.  The bottom line is to think that Berkshire Hathaway is all about Warren Buffett is to miss the point of how the business succeeded.

So to the question can Berkshire Hathaway succeed without Warren Buffett at the helm, I answer, that is the wrong question.  The question should be has Warren Buffett and Charlie Munger  identified the right people to step in when they are done?  Now we do not know who has been picked, other than somebody has been picked.  There is much speculation that for the insurance side it is Ajit Jain who runs some key reinsurance divisions at Berkshire now.  According to Buffet, Mr. Jain has performed brilliantly and produced underwriting gains even in the most difficult climate.

No doubt there is much concern over who will take over.   But in the short run does it really matter?  When Buffett steps down, there might be a short term drop in stock price, but if you are a Berkshire owner and believe in the same investing strategy as Buffett/Munger, then you believe the value is in the cash flow and success of the business.  And short term there will be no change to the cash flow in that as all 68 non-insurance businesses will still be running and since most investments are made for the long term there should be no immediate investment changes where large mistakes could multiply.

So in short there should be no change in intrinsic value for the company. 

Now long term no one can predict for Berkshire or any other company.  So as always one has to watch closely, monitor financials, and make sell decisions based on fundamental negative changes.  Now there is a viewpoint that it is not Warren Buffett who is so much more talented than the rest of the investment world, but his strategies which came from Ben Graham, and were pursued so relentlessly by Buffett/Munger.  If that is the case, and Buffett states it is, then as long as he finds someone that can do the same, Berkshire will be fine.

My gut reaction is that until proven otherwise, Berkshire is the gold standard to which other companies need to be compared to.  No doubt down the line, there could be another company or two that will emerge as a new gold standard.  But that is individual investors responsibility to analyze!  If the uncertainty of Buffett’s age is too much for you to handle, then don’t invest!  But make sure your reticence is not ageism!

 Note, if ever you wondered about the madness of markets, Berkshire Hathaway B’s (BRKB) going up almost 20% in one day based on no news is proof!

*******Never invest based on what anyone else tells you to!  Always do your own research.  Always make your own decisions and live with them.  Blogs are notorious for giving out BAD advice.  Shafer Financial is not a Registered Investment Advisor, has no licences to sell stocks or bonds, nor does the SEC think Shafer Financial is an investment expert.*******************************

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Comments»

1. Joshua - March 11, 2009

Dave,

Thanks for the response on my questions. I’m sure that as intelligent as Buffett and Munger are they will do the right thing and ensure their stakeholders are taken care of. But then again, ya never know.

I have a second question to posit to you…

The BawldGuy said that someone my age might be more interested in investing in an EIUL for $50 per month than a DRIP in say HCN.

I don’t recall in any of your previous posts, or BawldGuy’s, where small amounts such as $50 per month were used for EIUL’s.

Can you post on such a topic? The numbers I see thrown around are massive amounts that someone at my level cannot currently afford and so a more targeted aspect to people my age and ability I think may need to be addressed.

shaferfinancial - March 12, 2009

Joshua,
Another great question. Think I will save it for a post. Look for it over the next couple of days!


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