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Buffett Succession At Berkshire Is Irrelevant

This article is more than 10 years old.

Editor's note: One week before David Sokol left Berkshire Hathaway, longtime money manager and Forbes columnist Martin Sosnoff filed this column, arguing why Berkshire doesn't need a reincarnation of Buffett as his successor.

The perception of Warren Buffett as Superman, a Nietzsche Übermensch divinely inspired, divinely endowed, seems to me all wrong. Not to detract from Buffett’s lifetime achievement, his numbers sing above my words, but let’s focus on what Berkshire Hathaway is today and its configuration post-Buffett.

All the wordage about succession and fully vetted jockeys waiting in the wings misses the point. With the massive acquisition of the Burlington Northern, Buffett made succession into a mute issue. His road map points to more major deals. Just announced: Lubrizol for over $9 billion plus debt.

Succession can never exert much impact on Berkshire’s equity portfolio. Legacy positions like Coca-Cola never get sold. Because of income tax consequences, they rest undisturbed while Berkshire benefits from compounding of dividend growth. The heart of the investment portfolio is in Coca-Cola, Wells Fargo and American Express , about half of $60 billion plus invested positions. Buffett is in no screaming need of young portfolio managers to carry the torch. The equity portfolio, in short, is history.

This two-headed beast with a gigantic pool of liquid assets, over $150 billion, is balanced by $94 billion in direct ownership of operating properties. Last year, Burlington Northern, then an equity holding, moved into the operating column after full acquisition by Berkshire. Geico, likewise, transitioned from equity to wholly owned decades ago.

Comparing earnings of the corporate operating conglomerate with prospective gains from equity positions and bond holdings, together over $90 billion, the ultimate conclusion is Berkshire’s locus inexorably distances itself from money management. Assuming a conservative compounding trajectory of 6 percent for the S&P 500 Index, equity portfolio valuation compounds at a $3.5 billion annual clip. Throw in another $1.5 billion of pretax income on a $35 billion bond portfolio or even $2 billion after tax on a $50 billion bond portfolio. You get to $5.5 billion for investment income.

Leaving aside for now the insurance sector’s earning power, operating properties last year yielded over $7 billion. Mid American’s pipeline and utility operations remains a steady earner at $1.1 billion. Like most major trunk lines, Burlington’s earnings recovered 50 percent last year, posting $2.45 billion in profits. Results are on track for $3 billion this year and maybe 10 percent growth in a normalized economic setting.

Berkshire’s insurance properties showed flat earnings, year over year, $5.2 billion. Underwriting profits recovered but investment income declined. The fire and casualty industry currently holds substantive underwriting overcapacity. Competitive forces, undiminished, push down premium rates. Interest rates, if they move up, help investment income but cut into book value as bonds sell off.

Buffett crows about Geico, but the auto casualty business is tough and gaining market share costly and hard won. New accounts are fickle and incremental policy holders often prove out as higher risk.

Insurance properties recovered last year, but underwriting results still rest $400 million below 2008’s numbers. Geico is Buffett’s pride and joy, but pretax underwriting results hold at $1.1 billion. Premiums earned last year rose just 5.2 percent. Not the greatest business in the world even for disciplined underwriters.


I tot up approximately $13 billion in operating earnings for Berkshire’s nest of companies. The history for insurance, railroads, manufacturing, retailing and services businesses is cyclical, bordering on cyclical growth during economic expansions.

For example, net investment income, a governing number for all insurance underwriters, actually declined last year for Berkshire, from $4.3 billion to $3.9 billion. Geico, more or less, holds under 40 percent of corporate operating earnings. You don’t want to own Berkshire for Geico.

Buffett deserves his kudos for financial crisis investing. The play in Goldman Sachs , after interest income, nets at least $2 billion in capital gains. High yield preferreds in Goldman, Swiss Re, Dow and General Electric could be redeemed this year but they carried yields ranging from 8 ½ to 12 percent. Some $30 billion was at risk here, not pocket change. Courage Counts! The risk-gain ratio was in Buffett’s column.

These redeemable preferreds put Berkshire’s pot for reinvestment near $60 billion, comparable with present equity holdings and then there is $34 billion in fixed income investments. My gut tells me goodly chunks of liquidity stand earmarked for acquisitions of operating companies. Berkshire has the where-with-all to buy two or three more Burlington Northerns.

You want Buffett today not for stock picking prowess but for macro gambits that push around chess pieces with $10 billion price tags. Burlington Northern was symptomatic of Buffett’s fifth and closing act. He is going to buy huge operating enterprises that at least participate in the normalized growth of the economy.

This is how Buffett lives on 10 years after he dies. He rests embedded in the long term viability of the country like a bee frozen in a jar of amber honey. There are dozens of capable executives who can oversee operating companies, even a handful are savvy deal makers, but few can stand alone as creative macro thinkers.

On page 102 of the current Berkshire annual report, the stock performance index graph is telling. It covers the past five years and shows Berkshire outperforming the S&P 500 Index, 136 percent vs. 112 percent. But, yearend 2008 through 2010 the market did better, plus 42 percent vs. Berkshire’s 25 percent gain. Buffett could have been more aggressive at the bottom of the market, early 2009.

I see Berkshire as a slightly better than average investment going forward. Buffett’s cult following needs to rein in expectations, but there’s nothing much to worry about here.

Does Goldman Sachs outperform Berkshire Hathaway these coming years? I’m betting, “yes!” In the eye of the financial hurricane of 2008-2009 Goldman stood overleveraged and out-negotiated by Buffett, who was underleveraged. Today, both are underleveraged, and flexing their muscles.


The Buffett story is winding down in a good way. The premium over book value eases gently. Even his eventual passing could be a non-event for Berkshire’s stock price.

Martin T. Sosnoff is chairman and founder ofAtalanta/Sosnoff Capital, a private investment management company with more than $11 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He was a columnist for many years at Forbes magazine and for three years at theNew York Post. Sosnoff owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: Lubrizol (bonds only), Wells Fargo, Dow Chemical and Goldman Sachs.