Warren Buffett, it appears, is worth less than he used to be.
Shares of Buffett's Berkshire Hathaway (BRKA) fell slightly, down about 1%, on Wednesday, a day after the company's legendary CEO announced he has Stage 1 prostate cancer. Buffett said his condition is "not remotely life-threatening" and would barely slow him down. (He won't be able to travel, while getting radiation treatment, for two months starting in mid-July.) Surely, part of the small drop has to do with the fact that few think Buffett is going anywhere soon. Nonetheless, the muted reaction of Berkshire's shares raise the question of just what investors think the 81-year-old CEO is worth to the company and its shares. The answer might be a lot less than they used to.
A decade or so ago, investors used to talk about the Buffett premium. That appears to have mostly eroded. Berkshire's shares trade for 1.2 times the book value of the company. That's nearly half the 2.3 price-to-book value they fetched back in 1998.
Part of Berkshire's drop in value certainly has to do with Buffett's age. But also weighing on the stock is the fact that it's not clear who would run Berkshire when Buffett leaves. The best guess from what Buffett has said in the past is that he envisions that his job would be split into four, possible five, positions. Berkshire has already brought on investment managers Todd Combs and Ted Weschler. And the company has said it might add another manager to the mix. That would take care of the investing side, though it's not clear how the portfolio would be divided.
Buffett has also said that he plans to name another successor who will manage Burlington Northern and the company's many other acquisitions it has made over the years, which includes ice cream chain Dairy Queen, paint company Benjamin Moore and many others. Buffett says he has picked the successor and it's someone who Berkshire's board of directors knows very well. It's assumed that the person Buffett has in mind is someone who already runs a company owned by Berkshire. Of those, the most likely candidate is probably Ajit Jain, 59, who has run Berkshire's largest insurance division for 25 years. But if Buffett is going for youth he might go for Greg Abel, 48, who runs Berkshire's MidAmerican Energy and is one of Berkshire's youngest top executives. But Matt Rose, 50, who is the head of Burlington Northern, might make the most sense, reflecting Berkshire's transformation from an insurance business. But oddly, Buffett says the person who he has picked doesn't know it. So it's still possible the person could leave the company before Buffett does, or, perhaps, not even want the job.
On top of that Buffett has said that he would like his son, Howard, to become the chairman of Berkshire, a title that Buffett, Warren that is, also now holds. Howard wouldn't have a day-to-day role at the company. How would all these people work together? Buffett hasn't said. Would they even get along? Who knows.
But at least some of the erosion of Buffett premium has to do with changes at Berkshire. A large part of the value of the company always had to do with the cash that was generated by the insurance companies and how Buffett invested that cash. But the company now makes a large part of its money from its operating companies. Buffett still invests that money, but he is relied on less to make that money grow than he used to be.
