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Berkshire investors consider life after Buffett

FOR the tens of thousands

of cult-like followers

of Warren Buffett’s investment genius, Tuesday afternoon’s announcement qualified as a seismic event.

“This is to let you know that I have been diagnosed with Stage 1 prostate cancer,” Buffett wrote Berkshire Hathaway shareholders Tuesday.

Buffett proceeded to explain that the cancer was caught early and has not spread in his body. Buffett’s doctors have told him his condition “is not remotely life-threatening or even debilitating in any meaningful way.” He will undergo a two-month treatment of daily radiation starting in mid-July. That will restrict his travel, but he will continue as Berkshire’s CEO.

The stock market seemed to take Buffett’s mostly positive remarks at face value. Berkshire fell only slightly the morning following the announcement.

Sadly, however, the news does highlight the reality that the 81-year-old Buffett will not remain at Berkshire’s helm forever, though it’s certainly possible he could be there another decade. So while most seem to agree this week’s news is probably a non-event in the short term, it does beg the question of whether Berkshire is a good investment for the long run.

At this point the market already seems to have priced in Buffett’s eventual departure from Berkshire. For decades the stock had a “Buffett premium” that recognized the Oracle of Omaha’s investing prowess. Now that premium is mostly gone. Berkshire is trading at only about 1.1 times book value. The stagnation in the stock price even led Buffett to start a rare buyback program.

Berkshire investors should now analyze the company’s collection of assets and future prospects without Buffett. In many ways that future appears bright. Buffett has assembled a robust group of companies under Berkshire’s corporate umbrella that touch on almost every aspect of the economy. He plays a hands-off role, allowing those subsidiaries to run on their own and then investing their cash.

That business model will continue in the post-Buffett era, and the businesses Berkshire owns will carry on. The next CEO (Ajit Jain seems the likely choice) probably won’t be as great as Buffett, but he or she will be plenty good. Though the person who takes Buffett’s place will face much scrutiny, he or she will also inherit the opportunity to invest many billions of dollars every year in the best opportunities all over the world. That will attract a talented person. Indeed, Buffett has advised investors to buy the stock when he dies if it drops dramatically in value.

The example of Apple provides a good comparison. Steve Jobs was widely and deservedly hailed as a genius. Perhaps nobody else could have done what he did at Apple. Yet six months after Jobs’ death, Apple’s stock was up almost 70 percent. Apple CEO Tim Cook may not be Jobs, but he is clearly plenty good.

Similarly, perhaps nobody else could have done what Buffett has accomplished over the past half-century at Berkshire. But what’s done is done, and the new CEO will inherit oversight of the many outstanding businesses Buffett has brought together. Cash continues to flood into Omaha, and the new CEO will be able to deploy it opportunistically. At some point there is likely to be a dividend also, which will attract certain investors.

Indeed, Berkshire’s stock is probably held back less by the reality that Buffett won’t be around forever and more by the fact that it’s hard to grow fast once you get so big. Berkshire needs to make multibillion-dollar deals now to move the needle, and those aren’t easy to find.

So investors probably shouldn’t anticipate the 20-percent-plus annual stock gains that made Buffett a legend. But the company will probably continue to be a conservative and modestly successful investment, with Buffett or without.

Preferably with, for many more years.

Staff reporter Bill Freehling writes this weekly column on busines

He can be reached at 540/374-5405 or bfreehling@freelance