the greatest investor of all time, calls time

It was an historic day in Omaha.

This analyst had the privilege of attending the annual meeting of Berkshire Hathaway at which Warren Buffet announced his intention to step down after sixty years. In those six decades Buffet has amassed the world’s greatest investment record and delivered the most extraordinary compounding of capital ever seen: a 19.9% compound annual return since 1965 vs 10.4% for the S&P500.

He has also profoundly influenced innumerable investors, large and small (including this analyst), has helped stabilize markets in times of crisis such as 2008, has had a tremendous impact on the culture, and made us all laugh with his wit and wisdom.

While the announcement comes as no great surprise given Buffet’s advanced age of 94, it was still a surreal experience in those final five minutes of the meeting to realize this was it. We were in fact hearing the long-anticipated announcement of Buffet's departure. He will step down at year end handing the reins to Greg Abel as the new CEO.

This year’s annual meeting will have in all likelihood been the last with Warren Buffet at the helm, bringing an end to several decades of an annual tradition for investors journeying to the mid-Western city to hear the Oracle of Omaha in person. For this analyst it made the pain of getting up at an ungodly hour to join the line for a good seat well worth the effort.

As the WSJ noted, there will never be another Warren Buffet.

He has timed his exit to coincide with another excellent year of financial performance. In 2024 the Berkshire recorded $89bn in net income, driven by bumper insurance underwriting profits of $9bn and strong investment gains of $52.8bn. Berkshire’s GEICO auto insurance business generated a very high pre-tax underwriting profits of $7.8bn, a margin of 18.5% on $42.3bn of premiums written. The non-insurance operating businesses put in a solid performance and operating cash flow for the business was a healthy $31bn.

Buffet realized over $100bn of gains on securities in 2024, boosted the firm’s holdings of cash and treasury bills to $330bn or nearly 30% of total assets (subsequently increased to $342bn in 1Q25) and did not repurchase any of the company's own shares – as clear a sign as any that Buffet does not view current equity valuations as particularly attractive. It does mean Berkshire can pounce on any opportunities that arise if market volatility increases and prices fall, but as he pointed out declines would need to be more substantial than those occuring in the first quarter and in April before they put meaningful capital to work.

With Buffet’s retirement, however, there are significant questions about the long-term outlook for the business.

The extraordinary returns generated by Berkshire over so many years have been a function of Buffet’s unparalleled capital allocation abilities, Berkshire’s unique structure, and a set of intangible factors ranging from a unique corporate culture, decades of earned trust and goodwill, and the charisma of Buffet himself. None of those factors will dissipate immediately but the extraordinary capital allocation skills and incredible personal influence of Buffet will, very sadly, soon be gone.

Sometimes it is hard to pin Berkshire down. Is it a conglomerate, an investment holding company or an insurance business? In some respects it looks like a traditional conglomerate with a vast collection of wholly-owned operating subsidiaries ranging from Berkshire Hathaway Energy, to the BNSF railroad and a host of other smaller and medium-sized industrial and retail businesses. In other respects it resembles an investment holding company with its $270bn of listed equity securities. While it has characteristics of both, it is Berkshire’s insurance business that is the glue that hold all those things together and makes Berkshire so unique. The vast majority of Berkshire’s public equity holdings and treasury bills are held within its insurance operations where its strong capital levels and history of excellent equity investment returns allow it to invest far more into stocks than a traditional insurer.

At the end of 2024 Berkshire’s insurance operations generated $170bn worth of ‘float’ – essentially cash premiums collected up front on insurance contracts with insurance claims to be paid out over time – allowing Berkshire to invest those sums in the interim. While technically liabilities, as long as Berkshire’s insurance businesses continue to write new business, that float is either stable, or continues to grow and so with no fixed maturity date, the float takes on the characteristics of equity rather than a liability. And given Berkshire’s legendary insurance underwriting discipline, it typically reports underwriting profits when averaged over several years. In other words, the cost to Berkshire of this equity-like funding is negative. They are paid to hold that money and invest it. Together with the reinvestment of all the earnings from Berkshire’s operating businesses as well as realized gains on its investments, this structure has been a capital compounding machine.

It is of course Warren Buffet’s unrivalled investment genius to which most people attribute Berkshire's success. There was never any question with Buffet in charge that all earnings should be retained and reinvested, given those returns were virtually guaranteed to be well above anything investors could achieve elsewhere.

Greg Abel is reportedly a very capable business manager and operator, helping to improve the performance of Berkshire’s various operating subsidiaries, but no one is entirely sure about his capital allocation skills and several shareholders raised that question at the annual meeting.

According to Abel, Berkshire’s investment philosophy will remain as it has for the past 60 years. Abel’s priorities will be to 1) protect Berkshire’s hard-earned reputation, 2) retain a fortress balance sheet and 3) ensure that capital allocation is commensurate with risk. They will look to reinvest in their existing businesses first, look to acquire companies outright second, and then look for stock market purchases. Acquisitions will always maintain a focus on value, and the outlook for the business over 5, 10 and 20 years.

That answer makes perfect sense of course, but that is also almost beside the point. No one alive today is capable of matching Warren Buffet in terms of investment selection. Berkshire shareholders have known for many years that the window of high excess returns from capital allocation is finite given Warren’s age, and most are grateful it continued for as long as it did. In a way, the bar is so high, that no replacement is expected to jump it. Simply put, we expect the reinvestment of earnings to be good, but not as great as it has been in the past.

What is perhaps less appreciated, is the impact of losing the person of Warren himself.

Berkshire commands a legion of loyal individual investors, far more than any company of comparable size. They are attracted of course by the company’s results, but also by Warren’s plain-spoken approach, his ability to simplify the complexity of investing, his wisdom, his integrity, his legendary wit and an ability to tell a good tale. Because of this, individual shareholders often feel an intimate connection to Berkshire that they are unlikely to feel about any other major corporation in America. This shareholder loyalty, Buffet’s hard-earned reputation (not to mention his controlling stake in the company) also means Berkshire management has incredible latitude in how they run the business. What other board would have allowed the CEO to invest 46% of the firm’s equity portfolio and 17% of the firm’s total assets in a single stock?

In a sense Berkshire possesses in Warren Buffet an intangible asset whose value is impossible to quantify, but is nevertheless as real as the rail lines at BNSF.

Greg Abel is a decent, likeable and very capable CEO, who is steeped in the Berkshire culture but there is no one that could fulfill the role of company spokesperson like Buffet.

It is hard to quantify what impact the loss of Buffet will have, however, when the inevitable rough patch arrives without Buffet there to provide confidence in the long-term outlook, individual shareholders may become more flighty. Management will still have extraordinary freedom of movement given control of the company will remain in the hands of philanthropic trusts managed by Buffet's children, but Abel might be subject to external pressures from investors that Buffet never was.

For the foreseeable future Berkshire will continue to do well just based on the operating performance of its various businesses and its ability to re-invest both earnings and the relentless inflow of insurance premiums or ‘float’, even if the returns on that reinvestment are not as extraordinary as those achieved by Warren Buffet. As long as those returns are above the rates achievable by investors themselves, it makes sense for Berkshire to retain and reinvest capital to keep the compounding machine humming.

On that score we continue to give Berkshire the benefit of the doubt and we retain our Berkshire shares. But being an owner of Berkshire stock and having the privilege of attending annual meetings hosted by the greatest investor of all time, will not be quite the same without Buffet. 

For many thousands of investors from around the world the annual pilgrimage to Omaha might come to an end.