What’s next for Warren Buffett

0:06Pushkin. Hundreds of people gathered this weekend to watch the Warren show. Warren Buffett. He's that guy. He's the patron saint of investing. He's the chief executive of Berkshire Hathaway, and he has this annual opportunity to share his wisdom with the masses. Today on the show, why do people buy shares in this thing? What is Berkshire doing with Apple? And the guy's 93. What happens to Berkshire Hathaway after Warren Buffett? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here in London, And I'm joined by Warren Watcher and closet Berkshire fanboy, Rob Armstrong.

0:49Rob, how are you going? I'm doing well. It's too bad we don't do video on this show because then viewers could see my tattoo of Warren Buffett, which is on my bulging bicep. Thanks, Rob, for that horrifying mental image. Let's crack on. Our colleague Eric Platt wrote this incredible series of four articles about kind of what's next. Yes. I hate to even utter this sentence about the patron saint of capitalism, Warren Buffett, but he is 94. Is he 94 or 93? I think he's 93. In any case, as an insurance guy, he has probably looked at the actuarial table and noticed that the probability that someone else will be running the largest conglomerate in America pretty soon.

1:40That date is approaching. I will just say my grandmother just had a birthday. She's 101 and she is in very good form. She's not, however, a billionaire, unfortunately. But so, Rob, you have met the great man, Warren Buffett. It's true. About five years ago, me, Eric, and Oliver Ralph, we were invited slightly out of nowhere to go to Omaha after asking for interviews for a million years. We thought this simply reflected the brilliance of our journalism. Only later did the three of us put together the fact that he just wanted to advertise that he was looking to buy a company in the UK if he could, and he figured we were the biggest UK newspaper.

2:24so he would talk to us. But so for the uninitiated, like Berkshire Hathaway is a slightly strange beast as a company, right? It's a conglomerate. It's like this weird investing company in and of itself, but it's not like an asset manager as such. Like just, you know, sketch this out for us. What is Berkshire Hathaway? Structurally, it's like a closed end fund, which means it issued a certain number of shares at the outset, you know, close to 60 years ago or whatever. And since then, you can trade the shares, but it doesn't issue new shares. It's just compounded that capital it raised initially over the decades and grown bigger and bigger and bigger.

3:06And there is not a big Berkshire Hathaway corporation. It's basically a smallish office with Warren Buffett and his lieutenants in it sometimes who just buy and sell stuff. Like what sort of stuff? Widgets? Well, they buy and sell stuff like huge railroads, hundreds of billions of dollars of Apple stock, many insurance companies, many utilities and energy companies. It's a huge, rich portfolio of mostly American equity assets. But you go to the office and it's like whatever it is, the sixth biggest company in the world or whatever by market cap or it's somewhere in there. And you go to this office in Omaha and it's like it doesn't even have its name on the building.

3:59It's like some random other company's name on the building. And we walked in there. We go up to the desk in this random medium-sized office building in Omaha and it's like, we're here to see Mr. Buffett. And we were really scared. And the secretary was like, yeah, yeah, have a seat. And Eric and Oliver and I sit there for like 25 minutes. And the thought dawns on us that we've been the victim of the most horrible prank in the history of financial journalism. Like someone has pretended to be Warren Buffett's secretary, called us and tricked us into flying to Omaha. About a half an hour later, the elevator goes ding.

4:38and who should walk into the lobby but Warren Buffett. He says, hello, boys. Sorry, I'm a little late. Let me show you up to the office. And it was kind of like a perfect Berkshire Hathaway moment. Like the impression that he gave us was like of this unassuming old man who comes and greets his guests personally at the elevators and like, oh, fumbles with the elevator buttons a little bit or whatever. Meanwhile, he's the richest man in the world. He terrifies other titans of business and finance. Yeah. He knows everything that is going on to the last decimal point. Yeah. So there is this incredible sort of PR element to the brilliance of Buffett.

5:21Well, yeah. And like these annual shareholder meetings that he holds are like a super big deal, right? It's like the Super Bowl or something. This is like the Lollapalooza of capitalism. The Lollapalooza. As they say. And he has this whole thing, right? He plays the ukulele and he loves cherry Coke. He gives out way chocolates. Yes. Yeah, he drinks cherry Coke and et cetera, et cetera. He's folksy. He is folksy. And the reason this PR is particularly important just at this moment is because for the last two decades plus, he has not outperformed the S &P 500. And we can go into the details of that and the arguments back and forth.

6:05But the fact is that no one is getting together in some other mid-sized Midwest American city. I don't know, Milwaukee, and having the annual festival of the S &P 500. No. Where we all say, you know, 20 years ago, I bought the S &P 500 and I compounded at 12 % a year. and now I'm rich and I'm drinking Pepsi and Coke and banking with JP Morgan and, you know, we're all going to have candy. Trackerfest. Call it Trackerfest. Trackerfest. Boringfest. Because that's the funny thing, right? Is that, like, you know, it's not heretical to say he's got this massive fund, effectively, invests in a bunch of stuff.

6:55Yes. Hundreds, thousands of people come to see him every year, you know, pontificating and, you know, doing his folksy thing. But is there really much difference between Berkshire Hathaway and the S &P 500? Okay, so there's a lot of things to say about this. So number one, you're right. Over the last 21 years, there is literally no difference. And the two lines on the chart, as it were, of returns of the two rarely diverge. So that is point number one. Point number two, Berkshire kind of matters as an institution in a way. It's been around a long time. People have fun with it. There's a lot of human connection there.

7:34And, you know, who are we to say its returns have been par with the market for 20 years? You people stop eating candy and having fun because the Financial Times says so. So I definitely don't want to rain on that parade. No. There is also a more serious point, which so Buffett, to his credit, has plainly said if he's going to outperform the S &P 500, it's going to be by a very small margin. And it's a very hard thing to do. He's too big. And the reason he hasn't outperformed is that it would be impossible, I think, is because it would be impossible for him to do so. Once you have a$900 billion company by market cap, you're the market, in fact.

8:13There's literally nothing that can happen to make him outperform. Yeah. You know what I mean? Yeah. No, exactly. Unless he like bet it all on one company, instead of putting whatever he has 20 % of the equity value in Apple? What if he just bet it all on Apple? He would get results that way different from the market. But keeping its current structure, there's probably no way he can outperform. He does, however, say, Katie, and this is intellectually a more interesting and difficult point. He does say Berkshire will be a bit safer. And safer than just being in the S &P. Safer than the market. But it's not clear what he means by that.

8:50So when most people in markets talk about safety, what they're talking about is volatility. And indeed, Berkshire is less volatile than the S &P 500, meaning in prosaic terms, the return line squiggles around less through time. But Warren Buffett himself thinks the squiggling theory of risk is wrong. He's like, if I'm a longtime holder, what do I care if the line squiggles? I care about where the line goes in the end. And the squiggling is like just offering me prices to buy and sell that I like. He's pro squiggling. Maybe being in markets until you're 93 just makes you pro squiggling. You take that long-term view that the rest of us don't get.

9:36And you're like, when the market squiggles down, you're like, awesome, I'll buy it. And when it squiggles up, you're like, great opportunity to sell and buy something else. And I think this is clearly for the long-term investor as opposed to the trader, he's clearly correct about risk. But the thing is, what does he then mean about being less risky than the S &P 500? Of course, Berkshire might be the least risky company in the S &P 500, right? Because it is well diversified, but we're not comparing it to any company in the S &P 500. We're comparing it to the S &P 500, which is a continuously updated group of companies.

10:14It's not like the S &P 500 is going to disappear. It feels like pop will eat itself. But like, so thinking of companies that he gets in and out of, right? You mentioned Apple. Why is he selling down his stake in that? Is there something he knows that we should all know? Have mobile phones proven to be a fad after all? I do not have the first idea, but I have the following guess. which is the two things have happened. One, Apple shares have gotten more expensive. So the PE value of the things have gone up. So he's thinking, I bought this thing. I've made a load of money on it. Maybe it's time to rebalance now that the stock is less appealing in that sense.

10:57And at the same time as that is happening, the rewards for holding cash are much higher. Yeah. You know, when he started buying Apple, cash was got you 0 % and now it gets you 5%. Yeah. And one of my readers wrote in and said, that's like in, I'm going to use a baseball metaphor, which you will not understand, Katie, but we do have an American ball sport.

11:19Your strike zone gets smaller, right? So the pitches that the pitches the market is throwing at you, when you're getting 5 % on your cash, you can just wait for the perfect juicy pitch. to hit it. Whereas when you're getting 0 % on your cash, you kind of want to get that out of the door. Now, Warren Buffett himself denies that he's doing this. But if you look at the evolution of the cash pile over time, it does seem to get larger when rates get higher. So I think there is an opportunity cost thing going on here with the sale of Apple. Yeah. I mean, yeah, it's not rocket science from that point of view.

11:58No. The other thing I wanted to pick your brains on is, you know, they've got this whole unit at Berkshire, which I really struggle as a Brit not to call Berkshire. And I'm really sorry about that, but it's Berkshire. You've been doing great so far, Katie. Keep it up. I've been doing so well. Hold on tight. But it's got a really big unit for energy, right? And it's got lots of carbon belching, wildfire causing companies sitting in this portfolio. And I get that these are companies that produce long-term value, but is there an argument that maybe, you know, if and when the company does get new direction, is it going to stick with this stuff?

12:45This is a very interesting question. I mean, the first thing I would say is that you have hit on one of the amazing things about this company, which is the aura of goodness and trustworthiness around it. And I cannot imagine a company run by anyone else that could own the things that Berkshire owns and still be as loved as Berkshire is. Right. I mean, nobody likes the insurance industry either, by the way. Right. Yeah. Last time I checked, banking isn't winning any popularity contests. And then he's got these carbon belching monstrosities, too. So it is a testament to the power of the man himself and the image he has meticulously built over many decades that Berkshire can own these value creating businesses and not bear so much of the publicity burden.

13:39And he himself says, look, we just play by the laws. Maybe you're right about the carbon. And when people tell us we're not allowed to do something, we'll stop doing it. We're good citizens like that. So fair enough. But at some point, Warren Buffett will not be running Berkshire. Yeah. And the people who are Buffett's top lieutenants now, Adjajane, Gregory, Abel, and the others, are going to be making decisions about the structure of the business. buffett has said in the past that when he dies there will be like a haze a swarm of investment bankers will settle all over berkshire hathaway in the hopes that they can profit from a breakup or sale of the businesses and he's said with confidence that all of those people uh will be told to go away maybe that's true or maybe that's not but i think those successors are gonna have to think about, does it really make sense in this world to have all these pieces where they are?

14:45And I think you've put your finger on it by pointing out that the energy business is where the questions will begin. Yeah. I mean, maybe they're stranded assets, but they haven't been stranded yet. I mean, that kind of leads me on to my final question, really, which is, it's only when Warren Buffett is gone, when he's not in charge anymore, that we'll find out what the Warren premium is on this stock. What's your sense? You know, you've met the guy. How meticulously kind of engineered is this PR image, do you think? And also, do you think it's a cult, like the cult of Warren? One of the things I like most about Warren is that when he's asked about the biggest influences on his career, one of the people he mentions most regularly and in the warmest terms is dale carnegie author of the famous book how to win friends and influence people and clearly buffett has worked hard yeah and says out loud that he has worked hard at making people accept his ideas and his way of doing things and he's been a tremendous success that said i don't know how big a buffett premium there is in this thing right now.

16:01There are certain ways to look at this company, especially relative to the S &P 500, where you start to think if it's not a bit undervalued. If you look, for example, at a metric called price to book value, which is how many dollars are you paying for every dollar of the company's net worth on its balance sheet, it's a lot cheaper than the S &P 500 because the S &P 500's price to book value has really gone up in recent years. Part of that has to do with the crazy adulation of tech stocks and the growth of tech stocks within the S &P 500. And if that starts to go the other way, I wonder if we might find out that right now, Berkshire, as you English people will call it, is actually a bit undervalued right now.

16:53I'm not sure about that, but I think it's an intriguing thought. Yeah, it's super intriguing. And if you are even slightly interested in this stuff, as we were saying right at the top of this conversation, there's a fantastic series that we've been running on FT.com on this led by Eric Platt and colleagues. Read it. Don't listen to us. Read that instead. Or read it as well.

17:17Righto. We're going to be back in a second with Long Short.

17:27Right. It's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. It can be anything. Rob, what is yours? I'm going to stick with the theme. Be Long Berkshire Hathaway. Are you? One, because any time I rattle on at length about how a given organization or company or person can't beat the S &P, they instantly start doing so. So this conversation we just had will cause Berkshire Hathaway to outperform. Cool. And also because, you know, that final point I made where it seems like there is a lot of froth in tech and other kind of companies that other than Apple, Berkshire doesn't own a lot of.

18:09And that could revert to the mean and Berkshire might have a good couple of years. Okay. Good. Cool. Well, I am shorting the heck out of news that Shell, the oil company, sold millions of carbon credits for CO2 removal that never took place to a bunch of Canada's largest oil sands companies. As Greenpeace are pointing out, selling credits for removing carbon from the atmosphere that just never happened is bad. It makes climate change worse. I feel like this is kind of not what carbon credits are supposed to do, I'm sure. Way to end the show on an up note, Katie. We're all doomed on that bombshell.

18:54Rob, I will talk to you again in a few days, maybe a week, something like that. So listeners, stay tuned.

19:32I'm Katie Martin. Thanks for listening.

19:53Hello, listeners. Just a small correction. A Shell-operated plant in Canada was granted millions of carbon credits for CO2 removal that never took place for use by some of Canada's largest oil sand companies. But Shell has clarified that Shell itself did not sell any of these particular credits.