Berkshire after Buffett

“Berkshire is the last great American conglomerate, with hundreds of subsidiaries fused with the backbone of the US economy. Its freight trains run over more than 32,000 miles of track. Its utilities provide power to 13mn customers and in Geico it owns one of the largest insurers in the country”

“But among the biggest contributors to Berkshire’s performance are stakes in a stable of blue-chip companies including Apple, Coca-Cola and American Express”

“‘One of the great mistakes of investing is people do end up reading the same thing,’ Weschler said in 2022. ‘The only way you’ll have success in the stock market is if you have a variant perception, something different from the masses’”

“The two investment lieutenants also share a similar investing ethos with the man they are due to replace one day: finding good businesses with strong management teams that are trading at attractive prices”

“In a new section for Security Analysis, the seminal work by Ben Graham and David Dodd that was republished last year, Combs described how he looks for a moat, a competitive advantage that would be hard for rivals to overcome. ‘Add on characteristics like low capital intensity, pricing power, recurring revenues, staying power, and the likelihood of long-term growth, and you have a great business,’ he added”

“If the pair cannot match what Buffett did, it raises a question about both the company’s value and its reason to exist in a world where passive index funds are touted as safer, cheaper and more reliable than active fund managers”

“Buffett has long cared about beating the index. In his 1957 annual letter he set himself the ambitious goal of beating the Dow Jones Industrial Average by 10 percentage points a year”

“During his career at Berkshire, he has outperformed the S&P 500 by more than 4.3mn percentage points”

“Since the pandemic, his protégés’ record has deteriorated. In both 2021 and 2022 they missed the S&P 500 by double digits”

“Combs and Weschler also hold stocks for a shorter period than Buffett, who has said that he buys a stock typically believing that the ‘holding period is forever’”

“Since 2010, Buffett sold his entire holdings in 63 positions with an average hold time of four years and three months. Combs and Weschler exited 48 stocks, holding for just two years and 10 months”

“Berkshire’s struggle to match the S&P 500 in recent years owes a lot to the tech-dominated rally. Without Apple the portfolio would have undershot the index by much more”

“In a world without Buffett, Combs and Weschler will still benefit from the company’s long-honed advantages, including something that hedge funds and private equity groups have been chasing in recent years: permanent capital”

“They will also retain access to unfathomably cheap credit thanks to Berkshire’s insurance business, the firepower that makes the company so successful and one of the main reasons investors cite for keeping the conglomerate together”

“Insurance customers pay premiums in a predictable stream of cash, which has to be deployed in liquid securities. Typical investors have to tap an investment bank for a credit line, paying fees to make investments with borrowed money. But so long as Berkshire’s insurance subsidiaries are profitable, the cost to tap those premiums for investments can be negligible”