Thursday, 29 April 2010

Should Warren Buffett look for a successor or return the money to his investors?

This weekend takes place the annual Woodstock for Capitalists (officially called the Annual Meeting of Berkshire Hathaway Inc). Warren Buffett expects that attendance will exceed 35,000. What will be in the mind of all these investors? I guess that a popular topic will be: Has Warren chosen a successor?

Finding a successor is normal for most companies when their founder chooses to retire. But, Berkshire is not a normal company. Berkshire is a bit like Cerberus, the three-headed dog of Greek mythology. To simplify we may say that it is one-third insurance group (a typical corporation), one-third private equity firm and one-third investment fund. A typical corporation requires a complex bureaucratic organization which takes many years to assemble and will become self-perpetuating. This is not the case with investment funds.

You may see collective investment vehicles (funds) as a pool of money looking for a manager to invest the funds pooled together by many independent investors. Or the other way around, you may see fund managers as promoters trying to persuade investors to trust them with their pool of money. Whatever way people see collective investment schemes, most investors never see the pooling of money as a perpetual commitment. Indeed, many funds even have a mandatory termination date.

So, should the independent co-owners of a diversified portfolio part their way or try to find another fund manager? Fund managers are a bit like artists, each one with his unique style. In that sense they are irreplaceable. For instance, when Pavarotti died his admirers did not try to find another Pavarotti. They simply turned their loyalty to another artist. He could be an opera singer, a rock star or even a painter.

At 86, Warren Buffett is the unquestionable master of value investing. Should his co-investors be in the look-out for a new master of value investing (which may not turn up for many years) or should they simply search for today’s masters of various other investment styles? Warren has always advocated the need to look for talented and honest people to run his operations, while stressing that he must not delegate risk control.

In the end, will the master investor surprise us on which Cerberus head leads Berkshire?

1 comment:

  1. One minor quibble here. It doesn't change the point of your post, but Buffett is actually 80 this year, so hopefully we'll have 6 years of his wisdom and stewardship beyond what you're thinking. Regardless, his run will obviously come to an end at some point. It will be interesting to see what happens then, although I'd rather not.