Will Berkshire Hathaway Stock Crash Without Warren Buffett? (w/ @InvestingwithTom)

[Music] Hey guys, welcome back to the channel. Uh, today we are continuing with the new money advent calendar. We're going strong, and I've got another great guest on the channel for today. We have Tom from Investing with Tom. How you doing, buddy?

Pretty good, man. How are you?

Yeah, I'm going very well. That mo is looking, uh, I don't know what—how do you describe something like that? Luscious? Joyful? Distracting?

Yeah, very itchy. Annoying to my girlfriend, I don't know, whatever label you want to put on it.

Oh dear. Idea. But you're almost there! Only a few more days, right? A couple of days to go?

Yep, on the couch to go.

Fantastic! Well, in this video, guys, we're going to be talking about Berkshire Hathaway, which is obviously Warren Buffett's company. Because I feel as though a lot of people, they know that Warren Buffett's the world's best investor; they know that Berkshire Hathaway is Warren Buffett's company. But when they—when they get pro—what is Berkshire Hathaway? Hmm, it's a little bit hard to understand. So we've got the goat YouTuber to talk about the goat investor today.

And we're going to break down Warren Buffett, his company Berkshire Hathaway, and also talk about what happens when Warren Buffett decides to step away from his top spot at Berkshire Hathaway. Because obviously, a lot of people are invested in Berkshire just for him, right? I mean, that's—I probably—you probably interview 100 Berkshire Hathaway shareholders and say, "Why are you invested?" and a lot of them probably say, "Oh, because Warren Buffett."

Yeah, yeah, for sure. I think a lot of people have sort of just treated it like a savings account over the years. They've kind of continued to put money toward them to just kind of give it to Buffett, and then they don't have to think about anything, and they can, like, live their lives and just, you know, Buffett.

It's so true! Buffett's just like their financial advisor, like their investment manager, I suppose.

Yeah, for sure. It's a stock that has, like, abnormally low trading volume because people just buy it and hold it forever, kind of thing.

Yeah, which is—it’s kind of crazy.

Like, a long—yeah, like long-term savings kind of thing. So, I want to start at the start, and I notice you've done— you've recently done an awesome article on this, and this is why we want to talk about this today. I want to probe and probe into your brain and draw out all of these Berkshire Hathaway facts that you've been learning about.

So, I'm curious as to how—how kind of Berkshire started and then from where it started, kind of how it's grown into what it is today. Because I feel like that's probably the best way to actually understand what this business is, right?

Yeah, for sure! Well, I guess if you go right back to the start of when Buffett first got involved, we're talking like the 1960s here. So, he's been in the business for an incredibly long time. Um, and many people will probably know Buffett's sort of original investing strategy. It was very Ben Graham—just look for, you know, low-quality businesses. It doesn't really matter if they're earning any money or anything, but they're just extremely cheap.

That's the cigar butts, right?

Cigar investing, exactly! Yes, so I guess Berkshire Hathaway basically started out as a cigar. It was sort of one of these statistically cheap stocks that Buffett was looking at. Um, so it was trading below working capital. So if you take, for example, all of the current assets and current liabilities—like, you know, cash and inventory versus debts that are due this year and that kind of stuff—it was trading at less than that amount. So it was like extremely cheap. You got the business, if it was profitable, was free; all the assets were free. It was like unbelievably cheap.

So that's kind of how Buffett first got involved. Um, it was basically like a lousy textile mill kind of business that was, uh, slowly sort of liquidating assets because the business was kind of going downhill over time.

Right, right. Um, and then it was kind of unusual. So Buffett sort of invested in it as a cigar butt originally. He then came to a deal with the management at something like eleven dollars per share they were going to buy Buffett shares off him for, and he was going to kind of bank a small profit and kind of move on and look for the next cigar butt.

Yeah, but when they—when he saw this offer turn up, they basically cheated him out of about an eighth of a dollar per share—like 12 cents per share or something. So they were trying to do the dodgy.

Yeah, and a swifty on Warren Buffett. Absolutely, yeah! And he kind of just got really angry and basically just started buying more and more stock, took control of the company in the mid-1960s, and booted out the management and kind of started building it himself from there.

So that's—that's hilarious! What a story! To me, that—to be honest, if someone said, "Yeah, that's really what Warren Buffett did," I'd be like, "No, that's not what—"

No, yeah, it's kind of funny that it happened that way.

Yeah, it's definitely pretty uncharacteristic. And if anyone's ever watched the HBO documentary on Warren Buffett, it kind of talks through the story. And Buffett—I don't think sort of realized at the time when he was sort of making that takeover move. But I think his father had just recently passed away, like literally a few days beforehand. So potentially that's what kind of made it like a out-of-character sort of—

Right, a little bit—maybe a bit more emotional than what he would normally be.

Yeah, because he is the master at controlling his emotions and just not being phased by anything, which is—is crazy.

Um, so it starts out as this—well, he buys in, he takes over the company. This is this—you know, he's essentially bought this textile business that slowly but surely is going bust and now it's—I don't even know—one of the largest companies in the world, um, and one of the most respected companies in the world. How does it get from, you know, a dying textile business to where it is today, where everybody just loves it?

Yeah, sort of one step at a time, I guess. So basically what he did is he took this lousy textile business and basically started selling off some of the assets. So he did actually keep the textile business running for about 20 years to a small extent, but essentially he was slowly kind of shrinking it down, selling off these assets. Um, you know, it basically has like a fire sale price; you were just getting rid of them.

Um, and essentially he just started putting that money into new businesses. So he started out, um, still probably investing in other cigar butts but slowly moved toward these higher-quality businesses, got into insurance. Um, you know, started working with Charlie Munger and just sort of kept purchasing business after business. And this made, you know, this sort of profitable engine start to get going, and then it's just compounding away.

So he'd buy one business that makes—that, you know, sends him some dividends and makes him some money and so on every single year. He then takes that money, buys another business, and just kind of repeats the process for decades, basically.

Yeah, it's the compounding effect, but not just through stocks—by actually just buying the whole company. And then you make, you know—your, I guess, conglomerate Berkshire Hathaway makes more, buys the next big thing, you're making even more, buy the next big thing, until now where, you know, Berkshire Hathaway is quite, uh—well, obviously a very large company, but very diversified.

And I also find that the sheer, you know, the fact that Buffett's been here and just doing the same approach for decades has meant that for new investors looking at Berkshire right now, it can be quite daunting because they own a lot of diversified businesses in different industries. They own a gigantic share portfolio, which has like 50-something stocks in it.

Um, so I guess when—a new investor is coming in and looking at Berkshire Hathaway for the first time, what is your best way of explaining to them what Berkshire Hathaway actually does?

Yeah, sure. So I guess they're still probably—they're still trying to run this compounding engine, so they've still got this collection of businesses. They build up a huge pool of cash, which every time that number comes out each quarter, it's always a huge news story—like, "Buffett's got so much cash at the moment."

Um, and yeah, there's sort of—there's probably sort of two or three main components to the Berkshire business. So they've got a group of insurance companies. Um, yeah, these insurance companies have, um, sort of poured fuel on the fire to grow Berkshire really fast, probably over the past few decades, basically.

So yeah, and I think, like, Buffett refers to the insurance business as like the engine—like the core of Berkshire Hathaway, is that right?

Yeah, yeah, for sure! So, I mean, um, Buffett had a—going way back to the 60s or 70s again, discovered this business called Blue Chip Stamps, which is not an insurance company. They basically, um, gave you, like, reward stickers when you went to gas stations and stuff like this.

And you could kind of—like Flybuys here in New Zealand. I'm not sure what you guys have in Australia, but—

Same, yep.

Yeah, cool! So basically, um, that was an okay business, but he discovered this idea of float. So, you know, people are out there with these tickets that have value, um, and the store owners that give away these Blue Chip stamps or these Flybuy points sort of pay, um, Buffett, who owns the company, in the meantime. And he sort of builds up this pool of money that he can just kind of use in the meantime until these points are redeemed, right?

Um, and it's the same concept with insurance. So people pay their premiums to insure their car. Um, while they wait for people to write off the cars or whatever, they can basically take this money, invest it. Um, and you know, the insurance—the insurance business is probably earning—it's not that profitable. It's probably earning a couple of percent on that money, um, but Buffett's taking that, you know, kind of profitable business and then cranking out like 20 percent of your returns with the money in the meantime.

Right! So, yeah, all about the float.

Yeah, right, okay! Yeah, because it makes sense. I mean, when you think about insurance, most—most of the time, insurance is just nothing. Like, for most people, you pay, and in most cases, you literally get nothing in return. I mean, you get—you obviously get a promise, but in reality, because most—I'd say it's unlikely that someone's going to make a claim. So at the end of the day, you're just handing over money.

Um, that's—that's the reality of it. So it starts with this, you know, insurance business, pumps out float. And then what are the other areas of Berkshire's business?

Yeah, sure. I guess at all times, with that money, Buffett's sort of looking for the best use of their cash. So sometimes it's buying into public stocks. That's where he, you know, bought into the Coca-Colas in the 80s, the Apples of the world, the banks, more recently the pharmaceutical companies—all that sort of stuff.

He's also bought quite a lot of private businesses. So they own something like 70 or 80 private businesses now, which is enormous. But there's probably a couple of key segments. So the insurance being a big chunk of it. The next one is Berkshire Hathaway Energy, so they have quite a few different basically utility companies that provide power to people.

And then the other big chunk is railway. So one of the biggest acquisitions ever was Burlington Northern, which used to be a publicly traded stock that I think Phil Town has written about investing alongside Buffett with, you know, in the past.

Um, so Buffett essentially acquired that whole business for—I forget the purchase price—but tens of billions of dollars. We're talking here! So those are sort of the core areas of Berkshire. And then, so three main areas: insurance, railroad, I guess, and energy. But then the other thing to factor in is these are businesses that over time, Buffett has bought—just bought outright and added them to the Berkshire family.

And now they've also—for the companies that are simply, you know, too large for that to be a reality, then they also take major positions in, like, stock positions in. So another, I guess, uh, important thing for people that are investing in Berkshire to remember is that they also have quite a sizable share portfolio. So they kind of own—they partially own a lot of other businesses as well, right?

Yeah, yeah, for sure! So I think you mentioned earlier on, Berkshire has something like 50 stocks in their portfolio, but it's really heavily concentrated up the top end. So if you look at, like, this is five stocks—I think it's about 75 percent of the portfolio. So probably, yeah, there's a couple of huge positions in there, like Apple is worth over 100 billion dollars now just that one stockholding alone.

And, you know, Berkshire in total is like 550 billion or something at the moment. So it's like 20 percent of Berkshire at this point.

That's insane! I'm trying to find Warren Buffett's portfolio and just at the time where you really wish you could find it, you can't. No, and now I've got an ad! No, here we go. So, yeah, so they've got Apple, 47—yeah, 48 of their portfolio; Bank of America, 10.6 percent; Coca-Cola, 8; American Express, 6; and then it dips down 4-3-2-1 and then points something.

So you're right, it's very, very concentrated at the top end. And so it's definitely worth remembering that when you're researching into Berkshire Hathaway, that there's this massive share portfolio of more businesses that are generating cash for Berkshire in some aspect as well.

Um, and then, so that gives us a good kind of grounding, I guess, I feel in what Berkshire Hathaway is and how it's come to be what it is today. But as we're talking about before, so much of Berkshire Hathaway is Warren Buffett. I mean, it—the identity—not even just in the media or whatever, but even in the businesses that they own and the share portfolio, the whole identity of those businesses and the portfolio is Warren Buffett.

Like, it's Warren Buffett's circle of competence, it's Warren Buffett's, you know, his interests and whatever! That he's also—like, he’s an 87, 88-year-old dude and Charlie Munger—I can't remember what Charlie Munger's official—I think Warren's actually 90 now—

And he's 19 years—Charlie’s 95 maybe?

95.

That's insane! Yeah, so they're getting on! They're getting on, and we wish them well! We wish them a long and happy life. But I figure there's got to be a point at which, you know, you get—I mean, let's be real here.

Um, as you age, your cognitive function slowly declines over time. So I actually feel that there will be a point of time where Warren and Charlie actually do say, "You know what? It is time for us to step down. We love what we do, but it is time for the next people to come through and take the reins." What does that look like? Like, who takes the reins and what happens? And do people just—do people freak out? Do they just, "I'm out of Berkshire; you know, Warren Buffett's going away." I don't know, what do you think?

Yeah, I think there's probably two sides of it. So, um, I guess if you look at everything that Berkshire already owns, there's, you know, 70 or 80 or 90 wholly owned companies. I think it's important to understand that Warren Buffett basically has nothing to do with any of those in terms of running the actual companies.

So when Buffett leaves, nothing changes with those subsidiaries, which are a massive chunk of the business. Probably the part that would change the most is how the cash that comes in from all these businesses gets allocated. So, making the new investments, which there's probably a couple of areas to focus on there.

So there's investing in stocks, which some people might know. Ted and Todd have kind of come on board in the last few years, and I think they manage probably 10 or 15 billion dollars each. So they're probably the likely candidates to move into that kind of position.

And probably something that a lot of people don't pay as much attention to is Berkshire also allocates a lot of cash to their internal businesses. So you've got someone like Greg Abel who oversees basically a lot of Berkshire's wholly owned subsidiaries. I think everything that's not insurance, he basically oversees, right?

Um, and they'll make a lot of investments internally. They'll spend a lot of money in Berkshire Hathaway Energy and in Berkshire Hathaway Rail. So I see probably Greg Abel overseeing a lot of that type of capital allocation.

Um, I definitely think, though, like despite the competence of the—of the succession plan, I still feel like if Warren Buffett were to, um, pass away or to step down, man, the stock just—I feel sorry for those shareholders because I feel like it'll just be inevitable that that stock will just crash.

I don't know! Or do you think that Berkshire Hathaway shareholders, you know, especially those that are long-term, you know, holders of the A shares or whatever, they're very much aware that, you know—they'll stay the journey regardless of who's running the business, I suppose. Do you reckon they'll do that? They'd be switching? Or do you reckon you'd just see a massive stock crash? I don't know—a bit of speculation, I think!

Yeah, I'll give you a speculation! If I—I think that for the most part, um, Buffett has been really good at communicating to his investors what's going to happen after he's gone.

And that's a good point! I've been reading Berkshire Hathaway's shareholder letters right back to when they started, and he was talking about this in the 80s! Like, he's been—he's been talking about, you know, when he was, I don't know what the method is—when he was 50 years old, he's like 50 or something—yeah, he's like, "If I die tomorrow, that's what's going to happen."

So he's been very clear on that, and it's gotten, you know, more, um, you know, likely that something's going to happen obviously in later years. So I think on one hand he's been really good at communicating to shareholders on what will happen, and I think on the other side of it, you've potentially got people that have invested in Berkshire maybe just in the last few years that might not understand that as well.

So potentially those types of people are sellers, at least in the short term.

Yeah, all right! I'm going to finish this video by asking you the ultimate question to round it out. If you were a Berkshire Hathaway shareholder and Warren Buffett stepped down or, you know, no longer running the company, would you still hold your Berkshire Hathaway shares or would you—or would you move that money somewhere else because you really just wanted Buffett to manage it?

Uh, what would you do?

I would—I would hold. That's my arm!

You'd hold. Um, you'd have faith!

Yeah, I've got faith that the underlying operating businesses are gonna still go okay. Um, I think even if Buffett was at the helm, there's potentially less, you know, opportunities for me to make massive investments. But they've started moving into more share buybacks and things recently.

Um, yeah, and I think it's, um, you know, if you look at something like a price-to-book value metric, for example, which has for a long time been Buffett's sort of proxy for intrinsic value for Berkshire, it's trading a lot lower than it has in the past! So potentially a lot of that is already priced in.

Um, so personally, I'm holding.

Yeah, not fair enough! Because I think that, well, obviously, Warren Buffett—the biggest name in investing—and there's—that's definitely going to have some impact. I got—it's important, I guess, as value investors to remember that you're not—yes, you are partly investing, I suppose, because of Warren Buffett. But at the end of the day, we're buying a business, right, with cash flows!

And the way I see it is that, you know, another example I would use would be a Tesla and an Elon Musk—that kind of is similar where, you know, so much of Tesla is, you know, Elon Musk and what would happen if Elon Musk walked away and did something different.

But at the end of the day, like, as a Tesla shareholder, I would still definitely hold my shares because at the end of the day, yes, Elon's great, and he does wonders for that business. But at the end of the day, the business itself is still a fantastic business that's, you know, set up by Elon! And, you know, it's like Buffett! And people like Elon—they put the building blocks in place.

And I think Bill Gates was like this, uh, before he stepped down as well—before—before Bill left, he made sure that any idiot could run his company. You know, just like he set it up. So I think that's one of his quotes—I can't remember it exactly, but it was just like, um, you know, the good thing about Microsoft is that it doesn't need a Bill Gates to still be a really good company, kind of thing.

Yeah, for sure! I mean, those guys have built the company over a long period of time, and I—I don't think it falls over overnight. But it's definitely, if you are someone that would hold onto it, you've got to watch it. You can't just, you know, coffee can it like you might have been able to do when Buffett wasn't there!

Yeah, yeah, exactly. Thanks very much for joining me, man!

No worries at all, appreciate it! Enjoy the rest of your—for you—enjoy the rest of your weekend! What's—what's the plans?

Going fishing?

Uh, I wish! I've got, um, I've got a—I'm planning to take about a month off in January, so I'll be doing lots of fishing then! But, um, I’m still pretty busy times over the next few weeks.

Yeah! Oh, thanks very much for coming on the channel, and, uh, and enjoy your holidays when they come up!

No, we'll do!

All right, see you, mate!

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