No. of Recommendations: 36
I am astounded at the belief in Buffett's immortality on this board.
Please wake up. Odds are that he will have passed on in the next 5-10 years. Abel is able, Ted has a good record, Todd is a dud. None of them is going to bet big on the next Apple.
We have no idea where Berkshire will be in 10 years. At best an average performer.
Though it's certain that Mr Buffett will soon no longer be in charge of capital allocation, my objection to this comment has its focus on the words "at best".
I would substitute "at worst" as a more reasonable expectation.
Berkshire has some modest advantages over the average US firm, many of which will fade only slowly.
Things like the strong emphasis on a bulletproof balance sheet ahead of that last fraction of a percentage point of returns,
the unwillingness to take on more leverage for the same reasons,
the unwillingness to reach for yield (taking bad paper when the good issues are offering little),
the tradition of patience to wait for a fat pitch,
the tradition of avoiding over-active trading and chasing short term fads,
the tradition of ignoring short term price and even earnings volatility,
the refusal to participate in auctions with the inevitable winner's curse,
the ability and willingness to move capital tax free from elderly cash cow units to units with opportunities for allocating new capital at high rates of return,
and (most importantly) a general emphasis on making investments in businesses with longevity entered at prices offering a margin of safety.
Plus, of course, the fact that the average existing business owned by Berkshire today is a little bit better than the average existing business NOT owned, so we go into the contest with a build-in tail wind for a while.
Nobody can do those things as well as Mr Buffett, so I expect that most or all of these factors will fade.
But the mere act of trying should ensure that one should rationally expect forward results a pinch better, not a pinch worse, than average.
Berkshire's rate of value generation traditionally, and still, outstrips that of the S&P 500 companies.
The price performance tie in the last 20 years has been accomplished while the S&P got more expensive and Berkshire got cheaper.
Let's call Berkshire's annual value performance gap above the average long run return from a US equity position the "X" factor.
I personally anticipate that each year's X factor after Mr Buffett's departure will be maybe 90-94% of the previous year's X factor: asymptotically approaching (from above) the monkey-with-a-dartboard rate.
While retaining a better than average degree of safety because of the balance sheet.
Jim
