One of the biggest obstacles to taking a long-term view of any business – listed or unlisted – anywhere in the world is that the shelf life of CEOs of large firms tends to be short. Whilst a typical American CEO lasts only 4-5 years, even in India successful CEOs rarely get more than a decade in the top job. So, if we want to value a firm’s cashflows beyond those 10 years, we have to have a view on the quality of the CEO’s successor. Unfortunately, for companies (and therefore for investors) it is very hard to get succession planning right. This story in the FT is about what must be the toughest succession planning challenge ever – succeeding Warren Buffett. As the FT explains, even with an unlimited budget, with best talent in America at its disposal and with more than a decade to plan for the event, Berkshire Hathaway is having a tough time finding a successor for the legendary investor.
The FT first introducers us to the Berkshire executives who are being groomed to manage hundreds of billions of dollars in the post-Buffett era – Ted Weschler and Todd Combs: “Combs’ background is insurance; the 53-year-old got his start at Progressive. An internship with Blue Ridge Capital, one of the “Tiger cub” hedge funds, led to a job at Copper Arch Capital before he we went on to found his own fund, Castle Point Capital, in 2005.
Weschler, 61, started out as a junior financial analyst at WR Grace before helping to start private equity group Quad-C Management, then launching his own hedge fund in 2000.
Like Buffett, they have described themselves as voracious readers, picking through newspapers, trade publications and company annual reports. In 2017 Combs said he got into the office at 7am or 8am and left 12 hours later, spending the day primarily reading.
In his previous job he often spent late nights poring over securitisation documents. “So it’s the puzzle,” he said last year. “It’s figuring out the puzzle. That’s where I get giddy.”
Weschler has described himself as a reader of “weird stuff” — such as trade publications Furniture Today and Uranium Weekly — in an attempt to gain an edge.
“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 FT then reassuringly adds that Messrs Weschler & Combs subscribe to the same investment philosophy espoused by Mr Buffett: “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.
For years after joining Berkshire, the pair would have lunch every Monday with Buffett, often joined by Tracy Britt Cool, another Berkshire alum. They would exchange notes on investments and talk shop.”
Mr Buffett has described hiring these two men as “one of the best decisions” he has made. He has also given these two investors freedom to run their $27 bn portfolio without having to check in with him. So far, so good. So, what could possibly go wrong in this immaculately planned succession?
“In their early years at Berkshire, Combs and Weschler racked up some spectacular gains that allowed Buffett to praise them for leaving him “in the dust”.
Investments including Mastercard, Visa and healthcare company DaVita helped the two managers beat the S&P 500 in 2012 and 2013.
In the years since, however, their portfolios have more often lagged behind the S&P 500 and the performance of Buffett himself, who still runs about 90 per cent of Berkshire’s investments. It is something the billionaire acknowledged in 2019 when he said Combs and Weschler were a “tiny bit behind” the index.
“It has been a tough time to beat the S&P,” said Buffett, “but that’s the deal we’ve got with them”.”
As in Marcellus, so in Omaha, Messrs Weschler & Combs have found it hard to beat the benchmark in the post-Covid era. The FT says, “Since the pandemic, his protégés’ record has deteriorated. In both 2021 and 2022 they missed the S&P 500 by double digits, according to the FT’s analysis; last year they also trailed the index.
Overall, according to the analysis, which used Morningstar data, the pair have generated an average total annual return of about 7.8 per cent over the past decade. That falls short of the 12 per cent return of the S&P 500 and Buffett’s own 10.2 per cent gain. They have trailed the index in seven out of 10 years.
Their portfolios, worth about $27bn out of a total $354bn, excluding billions of dollars of pension investments for Berkshire’s employees, are up about 113 per cent over the past 10 years.
That trails a 165 per cent gain by Buffett over the same period and a 211 per cent total return by the S&P.”
So what happens next? In true Berkshire style, more of the same. It appears that Messrs Weschler & Combs will be given more time and rope to figure out how to beat the S&P500 on a sustained basis using Berkshire’s formidable competitive advantages eg. “Nor will they be pushed to make distributions to shareholders — Berkshire last paid a dividend in 1967 — or bow to a noisy activist investor if there is a long period of underperformance or a sudden shock.
That, historically, has allowed Buffett to make wagers and hold on to them even when the market turns decidedly against his positions, as it did after the oil embargo of 1973 and in 2008, when the financial crisis roiled markets.
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…”
Please note that Marcellus’ Global Compounders Portfolio owns shares in Berkshire Hathaway. Several Marcellus staff members and their relatives have invested in the Global Compounders Portfolio.
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