Let's get this out of the way -- I'm a huge Warren Buffett fan. Some of the best investing lessons I've ever learned came from reading Buffett's annual letters, and there are hundreds of quotes Buffett has said throughout the years that all investors should hear.
However, Buffett is not the primary reason I own Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) stock in my portfolio. And for that matter, Vice Chairman Charlie Munger isn't either -- although he is just as entertaining and informative to listen to as Buffett. Think about it this way: While we certainly hope the pair sticks around for a while, owning a stock just because an 89- or 97-year old is running the company isn't exactly the most durable investment thesis.
In fact, the reason I plan to own Berkshire Hathaway stock until my retirement (I'm 38) and beyond is precisely because Berkshire Hathaway will do just fine no matter who is at the helm. The company is built to generate market-beating returns for investors with little impact from its CEO.
Berkshire is truly a "ham sandwich" business
In the 56 years since Warren Buffett took control of a struggling textile manufacturer known as Berkshire Hathaway, the company has evolved into a massive conglomerate of more than 60 subsidiary businesses. Just to name a few of the most well-known Berkshire subsidiaries, the company is the parent of GEICO, Dairy Queen, Duracell, and Fruit of the Loom.
With a diverse array of dozens of businesses, it might seem like a never-ending job for a CEO, but that isn't the case. In fact, Berkshire gives the managers of its subsidiaries a great deal of autonomy when it comes to running their operations. For example, although Omaha-based Berkshire owns Dairy Queen, the restaurant chain is headquartered in Minnesota and has its own CEO (Troy Bader) who manages the day-to-day operations. There's even a layer between Buffett and the managers in Vice Chairmen Ajit Jain and Greg Abel, who oversee Berkshire's insurance and non-insurance operations, respectively. (Note: One of these two will presumably take over for Buffett as the next CEO when the time comes.)
Buffett and the rest of Berkshire's management team play very little role (if any) in the operational decisions of the company's subsidiaries. Of Berkshire's 377,000 employees, just over two dozen actually work at corporate headquarters -- the team's main function is to allocate capital, not to run the company's businesses.
In fact, when Berkshire makes an acquisition, one of the requirements before a deal can be made is a management team already in place. Buffett's general philosophy is to find great managers and not try to change their methods. As Buffett puts it, "…the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing."
Buffett has referred to certain companies as being so easy to run that a ham sandwich could be CEO and things would run just as smoothly. And that's exactly what Buffett has built in Berkshire Hathaway.
But what about the stock portfolio?
So far, we've addressed Buffett's involvement -- or lack thereof -- of involvement with Berkshire's subsidiary businesses. But what about the massive stock portfolio?
Berkshire's stock portfolio is worth over $200 billion, and most of the investments were hand-selected by Buffett himself. And there's no question that Buffett is one of the greatest value investors of all time.
But there's a plan for that as well. Buffett's stock picking lieutenants, Todd Combs and Ted Weschler, have each been given an increasing amount of Berkshire's capital to manage. And the early results have been promising -- one of these two were responsible for making Berkshire's first Apple (NASDAQ: AAPL) stock purchase, and the pair is also responsible for buying Amazon (NASDAQ: AMZN) in the portfolio, just to name a couple of examples.
Combs and Weschler have been groomed for years to prepare them for the day when they'll have to take over Berkshire's investment portfolio. And they not only appear to be up to the task but will largely operate independently of whomever is occupying the CEO's desk.
A compounding machine with all the right pieces in place
As Buffett said in his most recent letter to Berkshire shareholders, "Berkshire shareholders need not worry: Your company is 100% prepared for our (his and Munger's) departure."
In a nutshell, Berkshire is going to do what it is designed to do, no matter who is in the corporate office. The operating businesses will continue to generate capital that can be used to acquire more businesses and invest in more common stocks. Not only does each business have its own independent management team, but the people at Berkshire who are over the capital-allocating part of the business are already in place.
Berkshire has been a fantastic business with Warren Buffett at the helm and will continue to be for as long as the Oracle of Omaha is in charge. And once Buffett is no longer the company's leader, not a whole lot will change -- and that's exactly how he designed it.