To put it another way, he believes investors should understand the downside risks that may come with every single asset.
But what about Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)? What are the risks of investing in this business, which has generated outstanding returns for investors over the past five decades?
The biggest risk
The most significant risk is the death of Buffett. Without the Oracle of Omaha at the helm of the business, Berkshire would look a lot less appealing. Granted, it will still be one of the largest insurance companies in the world and have more than $120 billion of cash on the balance sheet, as well as a $220 billion equity portfolio, but without Buffett, the group's capital allocation will attract much more scrutiny.
For example, the market might not be forgiving as it is at the moment if any other manager was holding so much cash on the balance sheet.
Buffett has spent the last few years trying to organize the group in a way that it will still be able to function when he leaves this planet. And I do not doubt the ability of his investing lieutenants and business managers who have been taking on more responsibility. Nonetheless, the potential uncertainty is something to consider.
Berkshire is unique because it is such a large business that is still majority-owned by one individual. After Buffett, this will no longer be the case. He is leaving his entire fortune to charity, and these charitable institutions will be disposing of his shares slowly over time. This will leave the group in the hands of its business managers and directors who will not have as much say over operations as Buffett purely because they will not have as much skin in the game.
I am confident that Berkshire's corporate culture will endure long after Buffett, but I find it difficult to believe that it will be business as usual after his departure.
The directors will be subject to outside influence Buffett never had to answer to, and they may be pushed into making decisions. Take Clayton Homes, for example. This business criticized for aggressive lending practices and sub-par building standards. Buffett has been willing to hang on because he knows his, and Berkshire's reputation can weather this criticism, but will other directors be so accommodating? It is difficult to tell at this point.
Also, one of the company's most significant advantages over the past few decades has been the fact that any CEO can come to Buffett's office to ask for money, and he can do a deal right there and then. This won't be the case when he's gone (or at least it won't be based on the information we have available today).
Decision-making will take longer and all of the directors will have to approve any deals. That's not to say that the company will not maintain its position as a lender of last resort. With $120 billion of cash on the balance sheet, it has plenty of resources to remain so, although Berkshire may not be able to move as fast as it has done in the past to take advantage of opportunities when they present themselves.
With more people managing the business, there's also going to be a risk that problems in one part of the group could grow out of hand and destabilize the rest of Berkshire. Buffett has been able to keep a watchful eye on the entire business ever since he took over five decades ago, and the selection of directors that will take over from him after he departs is unlikely to have the same overview of the situation at all times.
These are just some thoughts on the biggest risk Berkshire shareholders face.
Disclosure: The author owns shares in Berkshire Hathaway.
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This article first appeared on GuruFocus.
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