Warren Buffett's $348 billion question for his successor

Surprising someone when you're 94 isn't easy, but Warren Buffett has retained that skill. Near the end of Berkshire Hathaway's annual shareholders' meeting on May 3, Buffett announced that he would step down as CEO of the sprawling conglomerate after six decades. The succession will come at the end of the year. Buffett had been preparing for his own departure, but hadn't told most of Berkshire's directors in advance. Nor had he told Greg Abel, his presumptive successor.

Berkshire Hathaway was a textile manufacturing company when Buffett bought it in 1965. In the following years, he built it into a vast insurance company and a conglomerate with interests in everything from energy to candy. He deployed a value investing strategy: looking for companies that looked cheap relative to their intrinsic value. Between 1965 and the end of last year, Berkshire's market value had increased by more than 5.5 million percent, with a compound annual return of nearly 20 percent. The total return of the S&P 500 index during this period was 39 billion.

Today, Berkshire has a market capitalization of $1.16 trillion. However, Buffett has left his successor a difficult task. Greg Abel has been with the company for a quarter of a century and, since 2018, has led its non-insurance operations, such as its energy, railroad, and retail businesses. The challenge goes beyond filling Buffett's role as "oracle." Berkshire's investment strategy is becoming increasingly difficult to execute.

Over the past year, Buffett has aggressively sold stocks, including much of his stake in Apple, a tech giant. Now, for the first time in two decades, Berkshire holds more cash than listed stocks. At the end of March, it had $348 billion (€308.247 billion) in cash and short-term US government debt on its balance sheet, more than double the amount it reported at the end of 2023. Its Treasury bill holdings represent about 5% of the outstanding market. If Berkshire were a foreign country, it would be the tenth-largest holder of US government debt, larger than India, Switzerland, or Taiwan.

So far, Buffett's decision to reduce stock market exposure has benefited Berkshire. The company's shares have risen 20% this year, while the S&P 500 has fallen 3%. Now Buffett and Abel must decide what to do with the amount of cash they have. There are worse problems, but Berkshire's position reflects a difficult environment for the type of investing Buffett made famous. He has complained lately that there isn't much to buy at a reasonable price. Even after the recent market turmoil, publicly traded company valuations are high relative to historical levels.

One option for Abel would be to expand more aggressively into overseas investments, where Buffett has made successful bets in recent years. For example, he invested billions of dollars in several Japanese trading conglomerates, such as Mitsubishi and Sumitomo. Abel could point out that among companies valued over $5 billion and with price-to-earnings ratios below ten, suggesting they are cheaply valued, 80% by value are domiciled outside the Americas.

Another option would be to move away from value investing in the hopes of finding more companies to invest money in. That seems unlikely, at least for the time being. Such a move would transform Berkshire's culture and risk the wrath of Buffett's army of admirers. After 25 years at the company, Abel is unlikely to pull the handbrake immediately.

Absent a change on either front, Berkshire will have to wait for a market downturn to find big new opportunities to use its cash pile. Buffett was adept at spotting these prospects. He acquired a large stake in Wells Fargo, a US bank, during a crisis in 1990. He invested in companies such as Johnson & Johnson and Kraft Foods (and Wells Fargo again) after the global financial crisis of 2007-09. The list goes on. Berkshire shareholders should hope Abel has the same oracular foresight.