Buffett devotees stick by him even as growth slows; Buffett Says Next CEO to Bolster Berkshire Aura for Crisis Deals

Buffett devotees stick by him even as growth slows

4:04pm EDT

By Jonathan Stempel and Jennifer Ablan

OMAHA, Nebraska (Reuters) – Short-seller Douglas Kass, Warren Buffett’s handpicked bear, raised a concern on the minds of many shareholders at the “Woodstock for capitalists” this weekend: Has Berkshire Hathaway Inc become so big that it will find it hard to grow?

Many retail investors who converged on Omaha, Nebraska, for Berkshire’s annual meeting on Saturday acknowledged that its fastest growth days are likely behind it. But they said Berkshire is still a good long-term bet as faith remains in Buffett and his management team’s more than 4-decade-long record of stellar returns, and the company’s tentacles into many sectors of the U.S. economy.

“Yes, it is a concern, but I have to get my expectations in line,” said Julie Fehrnstrom, a mother of three from Orinda, California, attending her fifth meeting. “They are not driven by short-term decision making and they have really smart management. You really don’t always find that.”Sherrie Palmer, a social worker from Portage la Prairie, Manitoba, was attending her first Berkshire meeting, one of 35,000 or so investors.

“The steepness of the growth is leveling off, but it’s not a concern,” Palmer said. “We like the manner in which decisions are made and I don’t worry about this being an organization jumping to a fad that won’t pan out.”

Patience has served Berkshire shareholders well. Investing in companies with dependable businesses and sound management has helped Berkshire as an investment trounce major competitors since Buffett took it over in 1965. Berkshire is now one of the largest U.S. companies by market value, with more than 288,000 employees in dozens of businesses, covering everything from ice cream to underwear and insurance to railroads.

But its massive size – currently around $268 billion in market value – has made it hard for Berkshire to grow as fast as it once did. While Berkshire performs well in down markets, it can lag in rising markets.

Buffett reminded shareholders that 2009-2013 may prove to be the first five-year period ever when the company’s growth in book value per share will lag the Standard & Poor’s 500 index including dividends.

“People who buy stocks now and hold stocks for 20 years will make money,” Buffett told Reuters Insider in an interview on Saturday evening. “Those who hold for 20 days, I don’t know what will happen.”

M&A, SUCCESSION

It has also become harder for the company to find deals that are large enough to move the needle. In February, Berkshire, along with Brazilian investment firm 3G Capital, struck a deal to buy ketchup maker H.J. Heinz Co, and Buffett said he was looking for more big acquisitions.

But in an interview on Friday, Berkshire Vice Chairman Charlie Munger said high prices have made attractive deals scarce. “With interest rates at zero, the prices being paid for businesses are very high,” Berkshire’s second-in-command said.

Still, size has advantages. Berkshire’s quarterly profit rose nearly 51 percent on solid performance in insurance and many of its other units. The results showed that its more than 80 businesses are benefiting from a strengthening economy, as illustrated by increased traffic on its Burlington Northern railroad unit, new customers for its McLane food distribution business and stepped-up demand for its Forest River recreational vehicles, to name just a few.

“In the 1990s, Warren was criticized for not being ‘state of the art,'” said Arthur Cohen, a financial adviser from Highland Park, Illinois, who was attending his 15th meeting. “I’m not critical of his performance since.”

Investors have also worried about what will happen to Berkshire after Buffett, 82, and Munger, 89, leave. In his most extensive comments to date about the future of Berkshire after he is gone, Buffett said he still expects the conglomerate to be a partner of choice for distressed companies.

Buffett said he and his board are “solidly in agreement” on who should be the next chief executive – but offered no names – and said his son, Howard, would become chairman to ensure that Berkshire had the right CEO in place.

“The key is preserving a culture and having a successor, a CEO that will have more brains, more energy, more passion for it than even I have,” Buffett said in response to a shareholder question at the meeting.

BIG BASH

As Berkshire has grown, so has the yearly extravaganza, now Omaha’s second-biggest annual tourism event behind the College World Series baseball tournament. The event attracted many well-known investors, including Mario Gabelli, Leon Cooperman and Chris Davis, as well as mom-and-pop investors.

Missy Krasso, a driver for Happy Cab in Omaha, makes as much as $3,000 in fares during the Berkshire weekend. Wall Street tips well, she said.

Before the meeting began, Buffett roamed an exhibit hall at the arena featuring Berkshire-owned companies. Cherry Coke in hand, he dipped coconut bon-bons in a fondant coating at See’s Candies, admired a model Burlington Northern railroad and tossed newspapers. Berkshire owns the Omaha World-Herald and others.

A new addition to the series of events around the meeting this year was an “Invest in Yourself” five-kilometer run through downtown Omaha, with Buffett starting it off, if not necessarily setting the pace.

The real mad sprint began at 6:30 a.m. on Saturday, when dozens of shareholders rushed for the best seats directly in front of Buffett and Munger on the arena floor, large enough to be suitable for a rock-star concert.

Sherman Silber, a fertility doctor who has attended the meetings for 15 years, said he misses the “old format” where he could just go to the podium and ask a question. “Now you have to do all this lottery stuff,” he said.

But Rosie Smith, a finance executive for a Baltimore book printer, said she keeps coming back for more.

“We came out here, and it was the wildest thing we’ve ever seen,” she said, referring to the first of her 10 visits to the meeting. “Every year, it keeps snowballing.”

Buffett Says Next CEO to Bolster Berkshire Aura for Crisis Deals

Berkshire Hathaway Inc. (BRK/A)’s reputation as a lender of last resort will get stronger under its next chief executive officer because the company will have more capital to deploy in times of crisis, Warren Buffett said.

“Berkshire is the 800 number when there’s really sort of panic in markets,” Buffett, 82, the current CEO, said May 4 at the company’s annual meeting in Omaha, Nebraska, referring to digits used for toll-free telephone calls in the U.S.

Buffett boosted returns at his company in recent years by injecting a combined $8 billion into Goldman Sachs Group Inc. and General Electric Co. during the 2008 financial crisis and $5 billion in Bank of America Corp. in 2011 after the lender’s stock slumped. Investors have questioned whether similar opportunities will be available after the departure of Buffett, whose bets can boost market confidence.

The next CEO will have access to even more capital as Berkshire expands, he said in response to a question from Doug Kass, the investor who was invited to ask bearish questions at the meeting. At times when there are limited alternative sources of liquidity, a future Berkshire leader will have the chance to make investments on favorable terms, said Buffett, the second- richest man in the U.S.

“When that happens when I’m not around, it becomes even more attached to the Berkshire brand,” he said.

Jain’s Role

Buffett’s company will be able to demand attractive rates under new leadership, “assuming the guy at the end of the phone line is Ajit Jain,” said Jeff Matthews, an author of books about Berkshire and a shareholder. Jain, 61, built a reinsurance business at Berkshire that guards against large risks that others shunned, such as asbestos liabilities and earthquakes.

“Ajit already gets those calls from around the world,” Matthews said in an e-mail. “And he handles them just as profitably for Berkshire as Buffett does.”

Investors have speculated about who might replace Buffett atop the firm that he and Vice Chairman Charles Munger, 89, built into a business valued at more than $260 billion. The CEO, who’s also Berkshire’s chairman and largest shareholder, dodged a question at the meeting about whether Jain was his successor, while praising him and other executives who contribute to the company’s success.

If Ajit is ever not with Berkshire, “we won’t look as good,” Buffett said. “That’s true of a lot of other managers, too.”

Berkshire’s board is “solidly in agreement” as to who should be the next CEO, he said, without identifying the individual. Buffett has said his roles will be divided once he’s no longer leading the company.

Combs, Weschler

Todd Combs, 42, and Ted Weschler, 51, former hedge-fund managers who were hired in the past three years, will oversee Berkshire’s investments. The company’s stock portfolio, valued at $97.2 billion as of March 31, includes the largest stakes in Wells Fargo & Co., American Express Co. and Coca-Cola Co.

Buffett said at last year’s meeting that the Coca-Cola investment and Berkshire’s operating businesses, including railroad Burlington Northern Santa Fe, were far more important to Berkshire’s growth than the Goldman Sachs or GE deals.

Buffett accumulated a stake in Coca-Cola for about $1.3 billion through 1994. The holding is now valued at more than $16 billion. BNSF, Buffett’s largest takeover, contributed $3.37 billion to Berkshire’s profit last year, more than 20 percent of the company’s total.

Goldman Sachs and GE preferred shares paid 10 percent dividends to Berkshire until they were redeemed in 2011. The deals also gave Buffett warrants to buy their common stock, which he agreed to settle this year.

Fighting Mediocrity

Kass asked Buffett why he thinks his son, Howard, 58, a Berkshire director, farmer and philanthropist, is best qualified to be chairman. The elder Buffett reiterated that the role would involve protecting Berkshire’s culture and wouldn’t have operational responsibilities.

Boards often struggle to replace mediocre CEOs when the panels only meet a few times a year and there are social ties between directors and managers, Buffett said. Part of the non- executive chairman’s role at Berkshire will be to ensure that the company has a top-quality leader.

“I know no one who feels that responsibility more,” Buffett said of his son. The father said he’s seen plenty of examples where an average CEO “continues to run the business year after year when somebody else can do it a whole lot better.”

The billionaire also has dropped hints about how he would like his successor to behave, and the importance of minimizing interference with executives who run Berkshire’s businesses. In a March letter to shareholders, he pointed out how most of the Berkshire-owned daily newspapers that endorsed a presidential candidate last year opted for Republican Mitt Romney. Buffett voted to re-elect President Barack Obama, a Democrat.

“When I write that sort of thing, I’m trying to box in my successor,” Buffett said. “We don’t want someone who thinks of Berkshire as a power base.”

To contact the reporters on this story: Noah Buhayar in Omaha at nbuhayar@bloomberg.net; Margaret Collins in Omaha at mcollins45@bloomberg.net

Buffett Says He Feels Sorry for Fixed-Dollar Investors

Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said he pities investors in bonds, even as he defended U.S. stimulus efforts that have sent yields to record lows.

“I feel sorry for people that have clung to fixed-dollar investments,” Buffett said at Berkshire’s annual meeting in Omaha, Nebraska, where the company is based. Individuals trying to live off bond payments are “victims” of U.S. policies to lower borrowing costs, he said.

Yields on debt from corporate securities to Treasuries (USGG10YR) have tumbled as the Federal Reserve slashed interest rates and bought bonds to help the economy recover from recession. The payout rate on dollar-denominated corporate debt fell to a record 3.35 percent on May 2, according to Bank of America Merrill Lynch Index data. It was 5.66 percent a decade earlier.

SPECIAL REPORT: Berkshire Hathaway Annual Meeting 2013

“The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal,” Buffett, 82, said at yesterday’s gathering. “I don’t know what I would do if I were in that position.”

Investors have flocked to bonds since the 2008 financial crisis, when the Standard & Poor’s 500 Index of stocks fell about 38 percent in a year. Taxable bond funds had $69.1 billion of net inflows in the first quarter of this year, leading all asset classes, according to Morningstar Inc. (MORN)

Supporting Bernanke

The Fed has held its target interest rate for overnight loans among banks between zero and 0.25 percent since December 2008 and is buying $85 billion of bonds a month. Buffett defended the policies set by Fed Chairman Ben S. Bernanke.

“I have a lot of faith in Bernanke,” Buffett said at the meeting. “If he’s running a risk, he’s running a risk he knows and understands.”

Buffett built Berkshire into a $268 billion company over more than four decades by buying businesses such as a railroad and insurers and making stock picks like soft drink-maker Coca- Cola Co. and lender Wells Fargo & Co.

The billionaire has bet on bonds when he considered terms favorable. In 2009, he agreed to buy $300 million in debt issued by motorcycle-maker Harley-Davidson Inc. (HOG) that paid 15 percent.

“We did not think Harley-Davidson was going bankrupt,” Buffett said at the meeting in response to a question about his portfolio. “Any company that gets customers to tattoo ads on their chests can’t be all that bad.”

To contact the reporters on this story: Margaret Collins in Omaha, Nebraska at mcollins45@bloomberg.net; Noah Buhayar in Omaha, Nebraska at nbuhayar@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

Buffett Says He Curbed Goldman Bet Amid Focus on Big Four

Warren Buffett, who passed on the chance to buy $5 billion of Goldman Sachs Group Inc. shares at below-market prices, said he’s taking a smaller stake in the bank as he focuses on his top holdings.

The lower stake for Berkshire is “the amount of money we would like to have in Goldman,” Buffett told Bloomberg Television’s Betty Liu in an interview yesterday in Omaha, Nebraska, after his company’s annual meeting. “Otherwise, we would have been putting a great many billions of dollars in, and that’s not an investment that we anticipate being in our big four, but it’s an investment we’re happy to have.”

Berkshire holds stock valued at more than $10 billion each of Coca-Cola Co., (KOK) Wells Fargo & Co., International Business Machines Corp. and American Express Co. Buffett told Liu last year that he wanted to keep a balance in his portfolio among companies in different industries and that San Francisco-based Wells Fargo is his favorite bank.

SPECIAL REPORT: Berkshire Hathaway 2013 Annual Meeting

“There’s a limit to how much I would want in banks compared to the whole portfolio,” he said. “I like loading up on the one I like best.”

Buffett in March struck a deal to settle Goldman Sachs warrants granted at the height of the 2008 financial crisis. As New York-based Goldman Sachs’s stock has risen, Berkshire’s paper profit on the contracts climbed to about $1.3 billion at the May 3 close.

Paper Profit

Goldman Sachs and Buffett said that the bank agreed to give him an amount of stock equivalent to his average paper profit in the 10 trading days before the warrants expire on Oct. 1. The deal reduces some risk for Berkshire, which would have had to spend about $5 billion for all 43.5 million shares it had the option to buy.

Buffett, 82, said the deal doesn’t preclude him from adding more shares of the bank, which he praised in a March statement as a firm whose leaders he has admired since the 1940s. Goldman Sachs has climbed 14 percent this year after rallying 41 percent in 2012 in New York trading.

Asked by Liu what would cause him to purchase additional shares, Buffett answered that he might buy if “it gets cheaper.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

Updated May 5, 2013, 8:05 p.m. ET

Buffett Offers a Sketch of Berkshire’s Next Era

By ANUPREETA DAS And DAVID BENOIT

Warren Buffett dodged a bear and stuck up for his son at a Berkshire Hathaway Inc.BRKB +1.25% meeting that otherwise provided few surprises.

For most shareholders, that was just fine.

It could be that Berkshire shareholders, a generally happy bunch given the meteoric long-term gains in the stock, as well as its 22% jump since January, didn’t have new questions. After all, Mr. Buffett himself invited hedge-fund manager Doug Kass, who is bearish on the stock, to “spice things up” at the meeting by asking tough questions.

Although one shareholder wanted to know why Mr. Buffett ate so many hamburgers, the five hours of questions from shareholders, financial analysts and journalists could be grouped into the following categories: the shape, size and value of Berkshire when Mr. Buffett is gone; the hidden identity of Mr. Buffett’s successor; whither big deals; the health of subsidiary businesses big and small; the U.S. recovery and Europe’s economic distress.

The answers haven’t changed much.

However, Mr. Buffett did go further than he has before in sketching out what Berkshire might look like without him.

An analyst asked how a successor could run such a broad and unwieldy operation, especially one with diverse small businesses. Berkshire’s major operations include insurance, railroads and manufacturing. Its smaller businesses run the gamut from newspapers to candy.

“My guess is that my successor will modestly organize things in a slightly different way,” Mr. Buffett answered. “But it doesn’t change anything. The real money is made by the major businesses.”

He was quick to add that the Berkshire culture will remain unchanged. He also said that he expects his son Howard Buffett, who will take on the mantle of nonexecutive chairman as part of a succession plan, will essentially be the guardian of that culture.

Mr. Kass provided one of the meeting’s more memorable moments, using the forum to pitch an idea to Mr. Buffett rather than asking a question. Knowing the Berkshire CEO’s negative view of short selling, Mr. Kass proposed that Mr. Buffett give him $100 million in a managed account to make a wager, in which he would donate gains to charity.

Berkshire Vice Chairman Charlie Munger handled the answer: “No.”

Mr. Kass also asked Mr. Buffett: “What gives you confidence that your successor’s imprimatur will add as much value to Berkshire as you have?”

Mr. Buffett’s answer reflected his belief that Berkshire is a brand that will outlast his name, and that because of its enormous cash hoard and prudent use of money, Berkshire will always be the go-to institution for ready investment dollars.

He said his successor as CEO will have “unusual” capital, especially during “turbulent times when the ability to say yes very quickly with very large sums sets you apart from virtually anyone else in the investing world.

“Berkshire is the 800 number when there’s really panic in the market… I think when you come to a day when the Dow has fallen 1,000 points a day for a couple of days and the tide has gone out and you find out who has been swimming naked, those naked swimmers will call Berkshire,” he said.

Berkshire invested $5 billion in Goldman Sachs Group Inc. GS +1.18% at the height of the financial crisis in 2008 and put $5 billion in Bank of America Corp. BAC +0.41%in 2011. The aid helped both banks shore up their cash on terms that were lucrative for Berkshire.

Saturday evening, shareholders huddled together in groups around downtown Omaha, parsing Messrs. Buffett and Munger’s words.

“What really hit me yesterday was the fact that they have really created a special and unique culture,” said Paul Lountzis, whose fund owns Berkshire shares. “No one will be able to sing the song and be the man that [Mr. Buffett] is. But there are plenty of smart and talented people” at Berkshire to do the job, he said.

Mr. Lountzis, who has attended more than 20 Berkshire annual meetings, said that Mr. Buffett also needs to “prepare shareholders” by delegating some questions to his managers at the subsidiary businesses. That, he said, would be the “natural future for Berkshire to make the meeting better.”

Other shareholders spent time reflecting on another of Mr. Kass’s questions: “How, beyond the accident of birth, is your son qualified to be non-executive chairman?” The younger Mr. Buffett runs a charitable foundation and operates a family farm.

“Many people have wondered about Howard,” said one shareholder who runs a small fund in Portland, Ore. “Warren handled it superbly and really spelled out what Howard’s role will be as a keeper of the culture.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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