What Happens to Berkshire Hathaway After Warren Buffet

Buffet has served as an inspiration, a calming voice and a leader by example throughout his career

February 2, 2017

by Wayne Duggan

U.S. News & World Report Logo. (PRNewsFoto/U.S. News Media Group)

Some people are so talented and successful that their notoriety reaches beyond their given fields and extends to pretty much everyone under the sun. You don’t need to be a basketball fan to know Michael Jordan. You don’t need to be a scientist to know Stephen Hawking. And you don’t need to be a music fan to know Elvis Presley.

When it comes to Wall Street, the man that everyone knows is Warren Buffett. Buffett has been so successful in his storied investing career that his name has become synonymous with value investing. Buffett began at age 11 by buying six shares of oil services company Cities Services in 1941. Twenty-one years later, he was a millionaire.

Buffett’s net worth now is roughly $73.7 billion, making him the third-richest person in the world.

Buffett’s investing strategy throughout the years has been remarkably consistent: invest in stocks that present long-term value and companies that have a durable competitive advantage. The central principle of Buffett’s philosophy is patience. Buffett has routinely waited 10 years or longer before cashing out of his positions.

Buffett has served as an inspiration, a calming voice and a leader by example throughout his career as an investor. Unfortunately, that career will not go on forever. Buffett is currently 86. While the investing community loves having Buffett around, the “Oracle of Omaha” isn’t immortal.

Berkshire Hathaway (ticker: BRK.A, BRK.B) investors certainly wish Buffett would live forever. Even throughout the rise of a new digital age of investing, Buffett’s holding company has continued to consistently outperform the market. In the past decade, Berkshire’s stock has gone up 125 percent, more than double the roughly 60 percent return of the Standard & Poor’s 500 index.

While many Berkshire shareholders are Buffett disciples, investors may not feel the same level of loyalty for Berkshire when the day comes that Buffett is no longer at the helm. The stock market tends to get spooked at the possibility of companies losing exceptional leadership. In the unfortunate event that Buffett has serious health issues or unexpectedly passes away, some investors may consider dumping Berkshire stock.

In the two days following Steve Jobs’ death in 2011, Apple ( AAPL) shares dipped 2.2 percent. If Berkshire shares drop on news of Buffett’s death, how would Buffett advise shareholders to react?

A buying opportunity. Buffett has a long history of buying stocks during cyclical or temporary periods of weakness. One of Buffett’s most quotable lines is that investors should be “fearful when others are greedy and greedy when others are fearful.”

In other words, it’s likely that Buffett would see any sell-off in Berkshire stock related to his death as a buying opportunity.

“If their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price,” Buffett wrote in a shareholder letter in 1977.

TJB Research analyst Tom Brakke says that Buffett wouldn’t want investors to have a change of heart about Berkshire stock overnight simply because he’s no longer around to run the show. “It seems to me that he would believe in his own portfolio of businesses and in the succession plan that he put in place,” Brakke says.

Buffett and Berkshire management are certainly aware of Buffett’s age, and the Oracle of Omaha is well-known for his long-term thinking.

“There is no doubt in my mind that he already has a plan in place instructing his board on how to trade the news of his death,” says Michelle Perry Higgins, principal and financial planner at California Financial Advisors. “That being said, I believe there is a high probability that at 86 years old, the expectation of his death is already priced into the value of Berkshire stock.”

A post-Buffett run? If Higgins is correct, Buffett’s death may have a surprisingly positive impact on Berkshire stock. While investors will certainly be saddened by the news, they may step in and buy the stock once the perceived headline risk has passed.

“He has done a fabulous job educating and involving his shareholders in his vision and philosophy,” says Salvini Financial Planning analyst Brooke Salvini. “If some less-knowledgeable shareholders are spooked by his death, there will be plenty of others [who] will gratefully purchase additional shares on a price dip.”

There’s a good chance Buffett would advise investors to buy Berkshire Hathaway stock today and not worry about short-term headline risk associated with his own health. Buffet has always chosen Berkshire’s holdings because he sees them as solid long-term investments for shareholders. Nothing about Buffett’s health will impact the businesses of the roughly 50 companies in which Berkshire currently invests.

Sure, Berkshire’s share price might go down temporarily when Buffett dies. It also might not. Buffett may live another two years or he may live another 15.

If Buffett has taught investors one thing throughout his decades of investing, it is don’t try to time the stock market and don’t try to predict what a stock will do in the short term. When Buffett finds a stock he likes, he buys it. If the share price goes down, he simply buys more. Berkshire investors should do the same.