Berkshire heads into annual meeting

With CEO Warren Buffett's degrading health, will investors get some details on the company's succession plan?

By Benzinga May 4, 2012 5:50PM

Warren BuffettBy Scott Rubin, Benzinga Staff Writer

Berkshire Hathaway (BRK.B) will hold its annual shareholders meeting this weekend, and CEO Warren Buffett is already predicting record attendance based on ticket activity.

"The tickets were a record breaker, but not by much," the legendary investor told Fox Business Network Friday. "I think we'll have about 35,000." The meeting is already considered to be an entertaining and informative event (it is nicknamed Buffettpalooza, after all), and will have an extra splash of excitement this year: For the first time, Berkshire will allow Wall Street analysts to pose questions directly to Buffett.

Three analysts, all with "buy" ratings on the stock, will query the Oracle of Omaha at the meeting. In light of recent underperformance by Berkshire and Buffett's prostate cancer diagnosis, the discussion is expected to be closely watched by investors.

"Now that Mr. Buffett has revealed health problems, I think investors will first want to be reassured that he still has the stamina to run the company, is still on top of his game, still is enthused about Berkshire and feels well enough to run the company another several years," Tim Vick, senior portfolio manager at Sanibel Captiva Trust Co., told MarketWatch.

He added that "longtime investors have taken for granted that Buffett would always be there for them, and that has made his presence and his health a more important matter to shareholders than the company's near-term financial performance."

Although Buffett said at the time that his prostate cancer is "not remotely life-threatening or even debilitating in any meaningful way," his plans for succession are key due to his advanced age. He will turn 82 years-old in August. Nevertheless, it is not unthinkable that Buffett could continue to run Berkshire for another five years or even longer. Besides his prostate cancer diagnosis, he is thought to be in excellent health.

"He will try to address his health problems early in the meeting as best he can, then move on," Vick said. "That has been the pattern at annual meetings in the past. He doesn't dodge these issues, but always confronts them honestly and in ways that satisfy shareholders."

Another issue that will certainly come up at the meeting is Berkshire's recent underperformance versus the Standard & Poor's 500 Index ($INX). Over the course of Buffett's time at Berkshire, the stock has returned around 20% per year versus an average advance of 9% for the S&P 500. It is a truly remarkable track record.

To a large degree, his legendary returns can be attributed to Buffett's style of investment. He has frequently commented that his goal has been to build Berkshire into a company that can withstand a 100-year flood. His value investing style often underperforms in strong markets and outperforms during down periods. As a result, the recent rally in risk assets has left Berkshire shares lagging.

In 2012, so far, the S&P has risen 10% versus 6% for both Berkshire's class A and B shares. Berkshire also suffers from its own extraordinary success. With a $200 billion market-cap and massive amounts of cash flowing in every quarter, Buffett's investing universe is quite small. The vast majority of investing opportunities are simply not available to him anymore. The only places for Buffett to deploy his massive cash pile are in very liquid, large-cap stocks or in all-out acquisitions of large companies like Burlington Northern, which Berkshire acquired in 2009 in a $44 billion deal.

This reality is something that Buffett has spoken about at length with shareholders. Simply, Berkshire is suffering from the law of large numbers, whereby it is much more difficult to move the needle on a $200 billion stock, that has significant hurdles in deploying capital, than it was 20 years ago when the company was much smaller.

Nevertheless, theses concerns do not preclude Berkshire from outperforming the S&P 500 over long periods of time. It is just more likely that the company will outperform by a percent or two as opposed to the historical 11% return above the S&P.

The other issue that is sure to be on shareholders' minds is succession. Buffett apparently already has someone in mind, writing in a letter to shareholders that the successor is "an individual to whom (the board of directors) have had a great deal of exposure and whose managerial and human qualities they admire." He also said that there are two backup candidates and that the transfer of responsibility will be fluid.

The succession plan also will split up Buffett's responsibilities. One executive will be responsible for operations, while one or two others will manage the company's investments. Many observers believe that the next CEO, or operations head, will be Ajit Jain, who currently runs Berkshire's reinsurance operations. Other candidates include Greg Abel, who runs MidAmerican Energy and Matt Rose at Burlington Northern. In 2010, Buffett hired little-known hedge fund manager Todd Combs to handle some of Berkshire's investing duties. Combs is considered a likely successor to Buffett as Berkshire's chief investment officer.

More from Benzinga
May 4, 2012 10:18PM
Warren Buffet is a gracious, intelligent, entertaining, humble guy whom I would not hesitate to trust in any situation.  There is nothing in Mr. Buffet's make up that's worth criticizing.  Period.
May 4, 2012 10:11PM
I pray for your recovery  God Bless you Warren Buffett
May 4, 2012 11:11PM
I wish Warren  Buffet the best with his health.
May 5, 2012 12:19AM
i love how a majority of you idiots made this topic about OBAMA screw off and stick to the story who gives a damn about obama he is an  idiot and only wanted to be the first black president not even the first good one point made end of story now if you would care to act like educated adults maybe we could discuss the real issue which is will warren buffett even last long enough to bring the company out of the slump its in and is it even worth investing in anymore with his failing health? Also you haters can give me thumbs down all you want it is the truth but most of you only spit up what you have been hearing on the news and think youre experts and only your statement matters
May 4, 2012 11:53PM
It's really astonishing how many of you are revealing by your comments that you're entirely ignorant of EVERYTHING about Berkshire, and Mr Buffett.  I can't help imagining you (collectively) in darkened rooms crapping in chamber pots and spreading the contents on the walls.  Writing here must be a thrilling diversion for you.  
May 4, 2012 11:44PM
Those of you who think there's really something significantly negative about Warren Buffet, please spare yourselves from revealing your only two-digit IQs, and that they're 2 sevens.

May 4, 2012 9:42PM
Dexter 426,
 You're such a fuqing retard you can't even spell " turd" right. Shut the fuq up and sit the fuq down you useless waste of  natural resources.
May 4, 2012 9:44PM

Dexter 426,

 p.s. ( you do know what THAT means, don't you ? )

 Stick to Craigs list rant and raves where you belong , you illiterate troll.

May 5, 2012 12:55AM
I agree with you ABNDADDY but my comments were geared towards those that missed the whole context of the story and immediately started in on the obama crap warren buffett and all the other high priced CEOs should pay there fair share but warren buffett has also given more to charity than most people would think and the man sure can run a company
May 5, 2012 1:17AM
Attend a meeting and listen to Warren and Charlie answer shareholder ? for 6 hours.  He'll impress you.
May 4, 2012 9:37PM
What's there to say ? BRK B has grown so big that is a different entity from only a few years ago. Soon it will be unable to grow or maintain at all due to its size. They may eventualy have to reform into several companies to be flexible enough to effectively invest in and respond to today and tommorows ever more fluid  financial / business / political  climate.
May 5, 2012 1:07AM

 I don't think there is too much limitation on the size Berkshire can achieve, because when Warren buys a company (he will only buy those with basically simple businesses which should still be profiting 100 years from now).  . 
May 5, 2012 1:01AM
It seems that there are a couple of you who might be shareholders, as am I for a number of years.  Warren has structured the company uniquely, and it's remarkable that no other company has imitated him because of the apparent simplicity and transparency.

May 5, 2012 1:19AM
Holt i would love to but i am just a little fish in a big pond but someday who knows but for now ill just watch the nimbers on the computer and hope the fearless leader can bring berkshire back up
May 4, 2012 10:50PM

Don't give up the ship Good Ol' Chap:

Your successors should be familiar with your railway stocks?  According to the  US Dept of Commerce, you should choose the Union leaders of Local 170 The Teamsters Chairperson and jointly with  the AFL-CIO Union Chairperson, because both Unions are likely to invest for retirement in the Railroads for free rail service in their blue collar golden years, for National travel.  Homeland Security should be on their advisory committee.  "The Warren Buffett Railways."  Est: 2012

May 5, 2012 1:06AM
Holt i think you have hit the nail on the head but the only problem being warren buffett structured the company so that he is the foundation if his health is failing then that would lead one to believe the company could fail with him the older and sicker he gets the bigger the risk of him making quicker irrational or irratic decisions based on his longevity so how can you feel secure in your investment when your investment has cancer and is getting old people did not invest in Berkshire they invested in Mr. Buffett
May 5, 2012 12:41AM
Oh so its indicative of a low IQ to want that rich F*** to pay his fair share of taxes?!?! *********
May 5, 2012 1:14AM
But you dont feel that he may make an irrational decision based on his health and his soon to be declining role in the company Just curious being that he has been a figure head and the face of his company for so long
May 4, 2012 9:39PM
I was asked to replace Warren Buffet but I graciously declined.  I won't run a company named after a man's shirt.
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