Tilson Funds Research Report – Berkshire Hathaway

Berkshire Hathaway: A Safe, High Quality, Growing Company With 30% Upside Over the Next Year

Who will replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into two parts: one CEO, who has not been named, and a small number of CIOs (Chief Investment Officers). A CEO successor (and two backups) have been identified, but not publicly named. Two CIOs have been named already, Todd Combs and Ted Weschler, both of whom are excellent investors.

Nevertheless, Buffett is irreplaceable and it will be a significant loss when he no longer runs Berkshire for a number of reasons:

There is no investor with Buffett’s experience, wisdom and track record, so his successors’ decisions regarding the purchases of both stocks and entire businesses might not be as good

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Most of the 80+ managers of Berkshire’s operating subsidiaries are wealthy and don’t need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett’s “halo” and superb managerial skills. Will this remain the case under his successors?

Buffett’s relationships and reputation are unrivaled so he is sometimes offered deals and terms that are not offered to any other investor and might not be offered to his successors

Being offered investment opportunities (especially on terms/prices not available to anyone else) also applies to buying companies outright. There’s
a high degree of prestige in selling one’s business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of
Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm.

Berkshire’s Culture Is Powerful and Unique: “A Seamless Web of Deserved Trust”

Berkshire operates via extreme decentralization: though it is one of the largest businesses in the world with approximately 360,000 employees, only 25of them are at headquarters in Omaha

There is no general counsel or human resources department. “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness.” – Charlie Munger

“A lot of people think if you just had more process and more compliance. Checks and double checks and so forth, you could create a better result in the world.  Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.” – Munger

“We will have a problem of some sort at some time…300,000 people are not all going to behave properly all the time.” –Warren Buffett

“Behavioral scientists and psychologists have long contended that trust’ is, to some degree, one of the most powerful forces within organizations. Mr. Munger and Mr. Buffett argue that with the right basic controls, finding trustworthy managers and giving them an enormous amount of leeway creates more value than if they are forced to constantly look over their shoulders at human resources departments and lawyers monitoring their every
move.” –NY Times,

Read the full research report here

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