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Buffett's Inevitable Decline

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asked Aug 15, 2015 10:20 AM by
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Might I please have your views on what to do and when to do it - and this refers to the inevitable first signs of Buffett's losing his 'touch' whether through aging, illness or, death. Whether Berkshire-Hathaway remains in good hands is, perhaps, irrelevant. It will be the unavoidable perception that it isn't that worries me. The price will drop and may take a while to come back, if at all. Yes, yes, perhaps it will be a good opportunity to buy more BRK-B at a bargain. What I want to ask is why Buffett, in his Letter to Shareholders is on record as saying that he will leave instructions that his wife is to receive, ultimately, Vanguard's S&P 500 ETF, not any B&H. Why does he feel B&H is not the better choice than that ETF? And should we, in anticipation of his decline and departure, also shift over to that (or a similar broadly-based US market) ETF?

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AAPL barely moved on announcements of Jobs' health, retirement, and death. I'm not sure it'll be large. Strong buy opportunities come with BRK if you are patient, Buffett suggests its a good buy at a p/b of 1.4 or lower.

Tim ( Aug 17, 2015 06:29 AM )edit

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answered Aug 17, 2015 09:11 AM by
Jin Won Choi gravatar image Administrator

Hi Jan, that's a good question.

If you read Buffett's communications to Berkshire's shareholders, you realize that succession is something that he thinks about a lot. While the board of directors is doing everything they can to prepare for Buffett's passing away, they acknowledge that they'll never be able to completely replace Buffett. However, the good news is that the collection of companies that Buffett has amassed over the years won't suddenly lose their value.

Since Berkshire's price today is based on the value of those companies, any dip in Berkshire's share price will be an opportunity to buy. Note that this hasn't always been the case. In the past, Berkshire's share prices have sometimes traded above the value of the companies it holds. The difference between Berkshire's share price and the company values was explained away as the "Buffett premium". The premium essentially reflected investors' optimism that Berkshire will outperform in the future because of Buffett's magic touch. This premium is low, if it even exists today. In other words, you're not paying much at all for Buffett's unique skills when you buy Berkshire today.

As to why Buffett wants his wife to own index funds instead of Berkshire stock, that's because he has already committed to distribute all of his Berkshire shares to charity. That said, Buffett will leave some cash for his wife, and he did leave an instruction for her trustee to buy index funds. While I'm not 100% confident as to why, my guess is that he's worried that Berkshire could be overvalued by the time he passes away. Berkshire, like most other public companies, has gone through periods of overvaluation and undervaluation. His wife wouldn't be able to tell these periods apart, so he's opting for the safe choice.

As someone with some experience analyzing stocks, I feel more confident about gauging whether Berkshire is overvalue or undervalued, and I therefore feel confident about leaving Berkshire in the regular portfolios. If Berkshire's price becomes overvalued, I will take it out of the regular portfolios.

I hope this answers your question.

Jin

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I understand what you're saying. I just can't help believe that, overvalued or not, any Berkshire unit will have a drop because of the loss of Buffett. (I suspect people will link Berkshire's success with Buffett more closely than Apple's success with Jobs). You're saying the value will remain. OK

jan.hill ( Aug 17, 2015 09:00 PM )edit

I would actually say that Jobs was more critical to Apple than Buffett is to Berkshire. Berkshire will do fine for at least a decade after Buffett's passing away.

Jin Choi ( Aug 21, 2015 09:43 AM )edit
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Asked: Aug 15, 2015 10:20 AM

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