Market Overview

Buffett, Berkshire Look Forward To Weekend's Annual Meeting

This weekend, Berkshire Hathaway (NYSE:BRK.B), the holding company run by legendary investor Warren Buffett, will hold its acclaimed annual meeting. Buffett told Fox Business Network this morning that he expects record attendance based on tickets. He said, "The tickets were a record breaker, but not by much. I think we'll have about 35,000." Interestingly, this will be the first year that Berkshire will allow Wall Street analysts to pose questions to Mr. Buffett.

Three analysts, all with buy ratings on the stock, will query the Oracle of Omaha at the annual meeting. In light of recent underperformance by Berkshire and Buffett's prostate cancer diagnosis, the meeting is expected to be closely watched by investors.

Tim Vick, senior portfolio manager at Sanibel Captiva Trust Co. told MarketWatch, “Now that Mr. Buffett has revealed health problems, I think investors will first want to be reassured that he still has the stamina to run the company, is still on top of his game, still is enthused about Berkshire and feels well enough to run the company another several years."

He added, “Longtime investors have taken for granted that Buffett would always be there for them, and that has made his presence and his health a more important matter to shareholders than the company's near-term financial performance."

Although Buffett said at the time that his prostate cancer is "not remotely life-threatening or even debilitating in any meaningful way," his plans for succession are key due to his advanced age. He will turn 82 years-old in August. Nevertheless, it is not unthinkable that Buffett could continue to run Berkshire for another 5 years or even longer. Besides his prostate cancer diagnosis, he is thought to be in excellent health.

“He will try to address his health problems early in the meeting as best he can, then move on,” Vick said. “That has been the pattern at annual meetings in the past. He doesn't dodge these issues, but always confronts them honestly and in ways that satisfy shareholders.”

Another issue that will certainly come up at the meeting is Berkshire's recent underperformance versus the S&P 500. Over the course of Buffett's time at Berkshire, the stock has returned around 20% per year versus an average advance of 9% for the S&P 500. It is a truly remarkable track record.

To a large degree, his legendary returns can be attributed to Buffett's style of investment. He has frequently commented that his goal has been to build Berkshire into a company that can withstand a 100-year flood. His value investing style often underperforms in strong markets and outperforms during down periods. As a result, the recent rally in risk assets has left Berkshire shares lagging.

In 2012, the S&P has risen 10% versus 6% for both Berkshire's class A and B shares. Berkshire also suffers from its own extraordinary success. With a $200 billion market-cap and massive amounts of cash flowing in every quarter, Buffett's investing universe is quite small. The vast majority of investing opportunities are simply not available to him anymore. The only places for Buffett to deploy his massive cash pile is in very liquid, large-cap stocks or in all-out acquisitions of large companies like Burlington Northern, which Berkshire acquired in 2009 in a $44 billion deal.

This reality is something that Buffett has spoken about at length with shareholders. Simply, Berkshire is suffering from the law of large numbers whereby it is much more difficult to move the needle on a $200 billion stock, that has significant hurdles in deploying capital, than it was 20 years ago when the company was much smaller.

Nevertheless, theses concerns do not preclude Berkshire from outperforming the S&P 500 over long periods of time. It is just more likely that the company will outperform by a percent or two as opposed to the historical 11 percent return above the S&P.

The other issue that is sure to be on shareholders minds is succession. Buffett wrote in a letter to shareholders that "the successor is “an individual to whom [the board directors] have had a great deal of exposure and whose managerial and human qualities they admire." He also said that there are two backup candidates and that the transfer of responsibility will be fluid.

The succession plan also will split up Buffett's responsibilities. One executive will be responsible for operations, while one or two others will manage the company's investments. Many observers believe that the next CEO, or operations head, will be Ajit Jain who currently runs Berkshire's reinsurance operations. Other candidates include Greg Abel who runs MidAmerican Energy and Matt Rose at Burlington Northern. In 2010, Buffett hired little-known hedge fund manager Todd Combs to handle some of Berkshire's investing duties. Combs is considered a likely successor to Buffett as Berkshire's chief investment officer.

Posted-In: News Hedge Funds Movers & Shakers Politics Management Events Global General

 

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