The faithful gathered in Omaha on Saturday (3 May) for the annual update from Berkshire Hathaway (NYSE:BRK.B) CEO Warren Buffett. And they got some news that almost nobody knew was on the cards. The great man is going to retire at the end of the current year, to be replaced by Greg Abel.
It seems Abel, who Buffett actually named as his successor four years ago, didn’t expect the announcement. Buffett told the packed audience that only his son and daughter were in on the secret.
So what should investors do now? Well, some already decided the time has come, and the Berkshire share price fell 5% on Monday when the US market opened after the weekend.
End of an era
Will the end of the Buffett era mean the end of 60 years market-beating performance? I doubt it.
Speaking of the approach he’ll take when he fills the hot seat, Greg Abel said: “It’s really the investment philosophy and how Warren and the team have allocated capital for the past 60 years.” He added that won’t change.
The company itself fell a bit short on earnings in the past year. But that’s not a very good measure of Berkshire Hathaway stock, with short-term success greatly affected by markets in general.
Bags of cash
The highlight? It has to be a record $347.7bn in cash and equivalents. Shareholders have been watching to see how that will be used for some time. But it seems Buffett is in no hurry to invest it. He still sticks with his belief that there really aren’t that many attractive targets for Berkshire right now.
Many investors believe in being full invested. But does that mean we should buy shares in companies just to fill our portfolios? Buffett told his audience that if he’d bought things just to get the cash pile down it “would be the dumbest thing in the world to invest in that manner.“
Berkshire performance
In the years between 1964, when Warren Buffett took control of Berkshire, and 2024, the stock has delivered a total return of 5,502,284%. The S&P 500, including dividends, has managed 39,054%.
That’s an average annual return from the index of 10.4% per year. And it really is pretty good, and shows the long-term returns generated by the most successful stock market on Earth. But Buffett’s annual average of 19.9% eclipses even that success.
The next 60 years?
I’m optimistic for the future, but we do need a note of caution. Part of the past success has come from Berkshire Hathaway stock trading at a premium to the value of the company’s holdings. At the moment, we’re looking at a price-to-book value of 1.7 times.
Will that Buffett premium translate into an Abel premium? If not, how much over book value will investors be prepared to pay in the future? We really don’t know yet, and we clearly face some uncertainty now.
But do I think investors looking towards the next 60 years should consider buying Berkshire Hathaway stock? You bet I do. I’ll leave the last word to Warren Buffett: “The long-term trend is up.“
