Buffett’s Possible Successor

Probably the number one concern among Berkshire Hathaway (BRKA) followers is the successorship of Warren Buffett. Buffett is in his mid seventies and clearly will not be around forever. What will happen when the cockpit is turned over to someone else? Will someone else be as investment savvy as Buffett? Surely not. Will Berkshire stock drop as Buffett himself is most likely valued highly by current shareholders?

Many people think Lou Simpson will take over for Buffett when the time comes. Simpson is the CEO of capital operations for Geico. Basically, he manages the float for Geico’s insurance business, which amounts to several billion dollars. Interestingly, while Buffett gets the credit for portfolio additions to Berkshire’s investment portfolio, often the smaller buys are the work of Simpson, not Buffett.

Taking a look at Berkshire’s holdings as of June 30th, we can get a good idea of which investments are the work of Buffett, and which have Simpson’s fingerprints on them. Buffett’s largest holdings are the ones he has held for years. Gillette, Coca-Cola, Wells Fargo, American Express, Washington Post, to name a few. After subtracting Berkshire’s top 10 holdings (mostly those older buys) as well as its position in Proctor and Gamble (due to the pending merger) and PetroChina (which was one of BRK’s largest holdings until it was trimmed dramatically in the first half of 2005), Berkshire’s $35 billion public company portfolio is narrowed down to less than $3 billion invested in 20 companies.

Since Buffett has stated in the past that Simpson manages about $2.5 billion, it is safe to assume this small portion represents what investors should expect to see on their position sheets should Simpson be named Buffett’s successor. As a result, more often than not relatively small new additions to BRK’s portfolio are the work of Simpson, not Buffett himself.

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2 Thoughts on “Buffett’s Possible Successor

  1. SiamTwin on August 31, 2005 at 12:01 PM said:

    perhaps too much emphasis is placed on the trading part of the berkshire empire? certainly, the bulk of the group’s earnings comes from operating companies nowadays. any thoughts?

    and how much of Buffett’s inevitable demise is already discounted in the share price, in your opinion?

  2. Chad Brand on August 31, 2005 at 12:22 PM said:

    While much of Berkshire’s earnings come from operating businesses (given that they rarely sell their public investments), much of the operations are in the insurance area. The float from the insurance premiums is how they fund their equity investments. In fact, more than half BRK’s net assets are in publicly traded companies ($35B out of $65B).

    Berkshire stock seems to trade in-line with the insurance industry. BRK trades at 2.0x tangible asset value. Insurance companies trade at between 1.6 and 1.8 times book, so a slight premium.

    I agree Buffett’s age is mostly priced in. I don’t own BRK, so I have not done a lot of work on it, but I doubt future returns will be all that impressive, not only due to Buffett’s limited life span, but also the size of the company today.

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