Warren Buffett’s eventual successor will often face the question, WWBD?
What Would Buffett Do? Apparently he would keep expanding Berkshire Hathaway Inc.’s horizons any way he saw fit. That’s the freedom the chief executive officer, who just turned 90, is giving the next CEO with this week’s announcement of a US$6 billion investment in Japan and other recent breaks with tradition.
By showing he’s willing to move beyond some of his long-held practices, such as an aversion to share buybacks and a propensity to stick with close-to-home investments, the billionaire investor is removing those handcuffs from his next-in-line as well.
“Buffett thinks about that all the time: How will it work successfully in the decades to come?” said James Armstrong, who manages money, including Berkshire shares, as president of Henry H. Armstrong Associates. “He’s constantly thinking for the longer-term horizon.”
Buffett has spent more than five decades building Berkshire into a wide-ranging conglomerate valued at US$521 billion, with businesses ranging from Geico to Precision Castparts to Dairy Queen. Inevitably, his successor will be second-guessed by questions about whether the famed investor would have made the same moves.
By expanding Berkshire’s horizons now, such as through increased buybacks, Buffett is giving the next CEO permission to pull off similar capital-deployment maneuvers, according to Tom Russo, who oversees more than US$9 billion, including Berkshire shares, at Gardner Russo & Gardner LLC.
As the conglomerate swells in size, Buffett has found it harder to deploy the company’s US$146.6 billion cash pile into higher-returning assets. The problem has hurt Berkshire’s stock, which has underperformed the S&P 500 index over the past decade.
His bet on five Japanese trading companies, announced Sunday, showed Buffett is more willing to step outside his home market, where the bulk of Berkshire’s investments reside.
To be sure, it’s not the first time Berkshire has invested in or bought foreign-based companies. Israeli toolmaker Iscar is one example. But he’s rarely taken as deep a plunge into a market abroad as he now has with Japan. He’s signaled his interest in the country before, saying in 2011 that he would be “delighted” to invest there and elsewhere in Asia.
“The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships,” Buffett said in a statement about his new Japan bets. “I hope that in the future there may be opportunities of mutual benefit.”
He’s also long favored investing in other companies or buying businesses outright over share repurchases, but a policy tweak in 2018 allowed Berkshire to start buying back more stock. While Berkshire’s annual total is routinely dwarfed by other big firms, the company has started to ramp up the practice, repurchasing a record US$5.1 billion of shares in the second quarter.
Buffett has always been cautious about the technology sector, preferring to steer clear of investments he couldn’t understand. But starting in 2016, he began piling into Apple Inc. stock. That change of heart has paid off, with Berkshire’s Apple stake valued at US$91.5 billion at the end of the second quarter compared with its cost of US$35.3 billion.
Yet, he’s still being careful about capital deployment. Buffett took about a year to build up his stakes in the Japanese firms, and he’s been spending just a sliver of Berkshire’s cash on stock repurchases. His bet on Japan is a reminder to investors that, even at 90, Buffett is willing to hunt for other ways for Berkshire to deploy capital, according to Russo.
“That’s the last piece to fall into the puzzle,” Russo said. It gives investors assurance that Berkshire will “be able to handle the cash flows that flow and the operating profits that build and deploy it in a way that, with buybacks alongside, keep the capital returns very agile and nimble.”