No. of Recommendations: 33
BRK might be worth more post Buffett. Greg might unlock value in the businesses.
There's going to be an emotional reaction when Buffett leaves the BRK scene. So be prepared for that. It will probably last longer than when Munger departed. But it's what happens after that that's important.
Greg is capable of unlocking a lot of value in the businesses. BRK is now an uncoordinated group of many businesses. It suffers the limitation of finding it difficult to reinvest its abundant cash flows. The era of still relatively cheap money and abundant competition from private equity has blunted its prior competitive advantage of being the lender of last resort. That might still change once more as the market is at peak levels of multiple improvement. Buffett may still have a final shot of picking up bargains. I - like others with most of my net worth in BRK - hope so. But we can't count on that for an ongoing solution to the problem of "bigness". We've been warned about that by Buffett for decades.
My base argument for Berkshire is that it will continue to retain its earnings. That will increase book value. As long as the market will place a multiple on book value, we will have a decent investment - not the past, but decent. But how long will the market place a 1.4 multiple on retained cash?
Meanwhile, we may be squandering the asset that BRK will still have - its very huge size.
Berkshire is built the way it is because Buffett likes doing what he enjoys doing, and avoids what he doesn't enjoy doing. That includes conflict. He doesn't want to manage businesses. He's not the one who puts pressure on individual businesses unless they're either (a) violating a promise - e.g. that the paint business won't market through big box stores - or (b) they're losing money in a way that can't be fixed. Otherwise, they're on their own.
Meanwhile, we have a large number of businesses, each with its own OH structure, operating independently.
Because of Buffett's management style, we now don't take advantage of the very size of BRK that limits it in reinvesting cash. The size that could permit operating efficiencies.
There must be very large opportunities to combine and make more efficient OH activities. From the Fortune article, look at what Greg has already done with the MSR businesses on operating margin. Look at what XOM has done with a far more efficient organization going in. Closing on $18 billion a year more in savings. What power would BRK have with a more combined purchasing organization given its size? Health, legal, HR, accounting, on and on .......
I'm not suggesting moving to the very centralized structure to the extent that XOM has. But BRK is far larger. There's lots of room in between for improvement.
These are the areas where Greg will have opportunities to more efficiently manage BRK. And he has the capabilities to do so. But he will need more management below him to permit him the time needed to focus on overall strategy, cash reinvestment, and high level management.
What might prevent him from doing so? My fear is that it will be viewed as a clash with the "BRK culture" as viewed by family members specifically voted to the board to prevent such changes. And with the voting power to do so
That's what I will be watching when Buffett moves on. What balance will the still controlling family votes reach between making BRK more efficient and preserving the "culture"? How well do they understand business going forward? Will Greg become frustrated?
