Warren Buffett, CEO of Berkshire Hathaway, turned 85 on Aug. 30th.
So, it goes without saying that Berkshire’s investors are concerned about succession planning.
Investor Whitney Tilson, founder and managing partner of Kase Capital, says Buffett is irreplaceable. Yet, he sees three reasons Buffett’s age doesn’t concern him one bit.
First, Tilson thinks it’s 80% likely that Buffett will be running Berkshire for five more years and 50% likely he’ll be doing so for 10 more years. Tilson doesn’t go into the actuarial math but cites a life expectancy calculator where he bets the over.
“I don’t think he’s going anywhere anytime soon. His life expectancy according to actuarial tables is probably 8 years and I’d put higher than that,” Tilson told Yahoo Finance. “So I think he’s going to be running Berkshire very likely for another 5 years. Reasonable chance for another 8 to 10 years.”
Second, the stock is undervalued even without factoring in a premium for Buffett.
“My valuation of Berkshire of $283,000 per A share does not factor in any Buffett magic. It’s very simply taking the investments per share of the existing business and putting a conservative 10x multiple on the earnings of the existing business. So there is no Buffett premium built into my estimate,” he said.
And third, Buffett’s powerful culture will endure. Berkshire operates via extreme decentralization. Though it’s one of the largest businesses in the world with approximately 360,000 employees, only 25 of those employees are headquartered with Buffett in Omaha.
In a recently updated presentation, Tilson included a number of quotations from Charlie Munger and Warren Buffett emphasizing decentralization, including this quote from Munger in May 2014: “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as a weakness.”
Tilson said the uncertainty around a successor isn’t something that keeps him up at night.
“It makes sense for Buffett not to name his successor yet,” he wrote. He added that naming a successor would be de-motivating for those not chosen while placing a lot of pressure on the pick. Furthermore, it’s just too early given much could happen in the meantime (which could be more than a decade).
Regarding mortality, Tilson pointed to the minimal impact on Apple when Steve Jobs left and died--less than 1%.
Tilson said a far greater risk to Berkshire shareholders than Buffett dying suddenly is if he begins to lose it mentally and starts making bad investment decisions without recognizing it. But Buffett is aware of this risk and has instructed the board, publicly and privately, to “take away the keys” if they see him losing it.
For more on Yahoo Finance's conversation with Tilson about Berkshire, see: Why Berkshire could go up $90,000 from here.
Yahoo Finance will live stream Berkshire Hathaway's annual meeting, exclusively, on Saturday, April 30.
