Berkshire Hathaway's Warren Buffett has revealed no plan yet to retire, but his investors are starting to look at life beyond the Sage of Omaha.
Welcome to Berkshire Hathaway, the company Warren Buffett, the world's second-richest man, runs from Omaha, Nebraska, and named after a Massachusetts textile mill he discovered before the Beatles had ever toured America.
Berkshire's engine is its insurance and reinsurance businesses, which Buffett realised as early as the 1960s, when he acquired Nebraskan insurer National Indemnity in his first big deal, would throw off enough cash to allow him to buy other businesses and make investments.
The fact it's based in Omaha may be one of the more conventional features of a company that even those who track it for a living say defies any of the labels available in modern corporate America. It's also what Buffett's eventual successor will have to wrap their head around.
While the billionaire, who turned 80 in August, has not signalled any plan to retire – indeed, he claims he would tap dance to his office if he could – this year has seen more public evidence of succession planning than ever before. On October 25, a four-paragraph press release said Buffett and Charlie Munger, his longtime business partner, had ended a three-year search for someone to help manage a significant chunk of Berkshire's $144bn of investments.
Step forward 39-year-old Todd Combs, an unheralded and unknown hedge fund manager from Connecticut. Investors suddenly have a name to conjure with alongside that of David Sokol, who runs Berkshire's energy business, and whose star has been steadily rising in Omaha.
"Long-term, we remain concerned about a lack of clarity around Buffett's CEO succession plans because we believe he is synonymous with Berkshire Hathaway," say analysts at Barclays Capital.
And 2010 has seen the number of investors swell. A stock split that was used in February to help pay for the acquisition of the Burlington Northern Santa Fe, America's second-largest railroad company, saw enough new shares issued to qualify Berkshire for entry into the S&P 500 for the first time, adding a new pool of shareholders.
As Berkshire and Buffett enter 2011, the scale of the Burlington deal – it was the biggest in Berkshire's history – looks like a sign of things to come. With a market capitalisation greater than Wal-Mart or IBM, the sheer size of Berkshire means that the era of Buffett unearthing much smaller, undervalued companies appears to be over.
At the end of the third quarter, for example, Berkshire was sitting on $31bn in cash. In the company's last annual report, the billionaire asked anyone who had a business that might be worth between $5bn and $20bn and met his other criteria to contact him – he, in turn, would only need about five minutes to let them know if he would be interested in getting his chequebook out.
As well as requiring bigger bets, greater size also usually means smaller returns. It's something Buffett acknowledged in his last letter to shareholders, lamenting that "the big minus is that our performance has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue".
Instead, he says, returns will be "above average, though certainly not spectacular". Stifel Nicolaus, a stockbroking firm, estimates that Berkshire's book value per share will grow 4.6pc in the five years to 2012 compared with the 33.4pc and 32.6pc seen in the two five-year periods between 1975 and 1985.
That Buffett has already made this clear to investors is likely to be welcomed by whoever eventually takes the helm. In fact, since the founding in 1956 of his first investment fund, Buffett Associates, Buffett has made it no secret that the principal objective he sets himself as an investor is not to lose money. His annual letter to shareholders informs them that in each of the 11 years that the S&P 500 has declined since 1965, Berkshire has fared better. "The $20bn of cash that we customarily hold is earning a pittance at present," he says. "But we sleep very well."
It's an approach that put him in a position to extract some very tough bargains when the worst financial crisis since the Great Depression swept Wall Street, triggering a desperate scramble for capital. In total, Buffett ploughed $12bn into Swiss Re, the reinsurance giant, Goldman Sachs and General Electric (GE) – investments which, according to Barclays Capital, have since generated $1.1bn of annual income for Berkshire.
"Initially Berkshire performed quite poorly as any company with financial exposure did," explains Meyer Shields, who covers the company for Stifel Nicolaus. "In the aftermath it did better because Berkshire's capital levels are second to none on the planet." However, with Swiss Re planning to repay the investment next year, and Goldman and GE likely to follow, Berkshire faces a stern challenge to reinvest the money for similar returns.
If Berkshire's 500,000 or so shareholders are beginning to anxiously ponder what life could look like after Warren, they will take some comfort that Combs's approach to preserving capital echoes that of his new boss. His Castle Point Capital Management fund ended 2008 down 5.7pc, while the hedge fund industry recorded a collapse of 19pc, data from Hedge Fund Research shows.
In October, he told his investors that "if we can find quality businesses at attractive risk-adjusted valuations, then we should be able to meet our investment objectives over time." The sentence could have been plucked from one of Buffett's letters. Indeed, Scott Sipprelle, who employed Combs eight years ago for a hedge fund he then ran, said that they were all "Warren Buffett junkies". With a background in the insurance industry, Combs, Sipprelle explains, "was a very data-driven investor. He definitely did not shy away from the number-crunching."
But for many of Berkshire's investors the comparison is likely to end abruptly there, at least for now. For besides his financial returns, Buffett has managed to become the public voice of a certain approach to investing. Observers say this is based on a mix of fundamental principles learnt from investment analyst Ben Graham – including that a company has an intrinsic value that can differ from the share price and that it's best to own investments for the long-term – and, more recently, of a shrewd self-promotion of his own Midwestern homilies on investing and life.
Frank Betz, who owns Berkshire shares at Carret Zane Capital Management in New Jersey, is one such investor. "I trust Warren Buffett," says Betz. "He's demonstrated throughout the last 50 years that his style of investing would prevail."
That style of investing has seen Berkshire amass a vast exposure to the US economy through its more than 70 subsidiaries. There is, for example, the ice cream retailer Dairy Queen; underwear maker Fruit of the Loom; Shaw's, one of the US's biggest carpet sellers, and Buffalo News, which publishes the daily newspaper for one of New York state's biggest towns.
The businesses lost more than 20,000 jobs in 2009 as recession engulfed the economy, but have hired more than 3,000 this year. Buffett will be hoping his well-known optimism on the US will begin to pay off next year.
Berkshire's latest third-quarter results offered some cause for hope. Burlington, a useful barometer for the economy as a whole because it transports freight around the country, delivered $706m of profits compared with $488m a year earlier. Earnings at the retail, services and manufacturing businesses bounced back more than 80pc to $1.1bn, though they were offset by weaker profits at the reinsurance divisions.
Investments outside the US are sure to be on the agenda of Berkshire's future leadership. It's an executive commitee Buffett has said he expects to be split between a chief executive officer and a chief investment officer. While the hiring of Combs appears to make him a front runner for the latter role, it seems unlikely to be guaranteed. This summer, markets buzzed with speculation that Li Lu, a Chinese hedge fund manager who helped Berkshire expand in China, was poised for a major role. Meanwhile, Solko's star may have been burnished further after helping this year to turn around NetJets, a private jet company that Berkshire owns.
"For those who have followed Buffett for years, there's so much trust in him they believe his culture will survive his tenure," says Shields of Stifel Nicolaus. "The newer investors are probably not so sure."
Both camps will be hoping it remains an academic debate for a long time to come.
