Succession
This week we discuss my trip to Berkshire, my thoughts about succession, and why the Mag 7 may be overvalued.
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Succession
I had the privilege of attending Berkshire Hathaway’s AGM this month. It’s an incredible weekend filled with meetings, dinners, events, and of course, the AGM itself, which is a real spectacle. I would highly recommend any serious investors (and I don’t mean just professional investors) try to attend. Timing is of the essence though, as Buffet is already 93 years old, and may not have too many more AGMs left in him.
On that note, the biggest change from the last time I attended was the lack of Charlie Munger on stage. The audience was certainly left bereft of Charlie’s quick wit and “Mungerisms.” It was fitting that the best question of the day was about Charlie, who recently passed, asked by a budding investor who is just beginning his life. To replace Charlie, Buffett had Greg Abel (Vice Chairman of Berkshire’s Non-Insurance Operations) and Ajit Jain (Vice Chairman of Berkshire’s Insurance Operations) join him on stage. Buffett has confirmed that Greg Abel will succeed him as CEO of Berkshire, and Ajit Jain will continue to head up the insurance business, the core of the company’s vast ecosystem.
The appointment of the two got me thinking about succession, and how companies handle future leadership. Abel and Jain are certainly qualified and whip smart, although on a table with Buffett and Munger, they are likely in the bottom half of the intelligence range (which says more about the table than it says about them). But what struck me, besides that both Abel and Jain need to work on their stage presence, is that neither is that young. Abel is 61 and Jain 72. Certainly, compared to Buffett they are teenagers, but in the corporate world, they would typically already be fielding questions about their succession plans. One could argue that Abel at 61 is not too old, but let’s not forget Buffett is still alive. If you assume he lives as long as Munger, Abel will be in his late 60s by the time Berkshire’s CEO succession takes place.
Buffett once said that “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will” and I’ve been thinking a lot about if this is still a valid way to operate. Now again, I’m not at all saying Abel and Jain are idiots, they are incredible talents, but they are facing a future that is quite unlike Buffett’s past. During the AGM, Jain faced several pointed questions about these topics. For one, Buffett was asked who would replace Ajit Jain if something were to happen to him (Ajit). But more poignantly, Jain was asked how come GEICO (one of the key parts of Berkshire’s insurance business) had not prioritized data analytics, and if it had fallen behind its competitor, Progressive. Jain had to admit that this was true, and that GEICO is still playing catchup. Later a question was asked about how autonomous vehicles will affect car insurance premiums, which again, management had to admit would have a significant impact on their pricing.
What awed me the first time I attended Berkshire was walking the convention floor and noticing the breadth of businesses the company owned. On one end of the floor were cowboy boots and the on the other were fractional shares in jets. In the middle, I saw railways, clothes, candy, jewelry, and homes displayed. Berkshire basically owns a wide slice of the American economy, and I can imagine why some investors are not too worried about their holdings when Buffett ultimately passes on. On this visit, I met a sharp investor who holds Berkshire as one of his fund’s largest positions. He deftly explained to me his reasoning behind his holding and the longevity of the businesses contained within the investment. My walk-through convention floor was a visual confirmation of his thesis.
However, the world is changing quickly and there will be several challenges, either driven by politics or by technology. Berkshire will have to face these challenges in their Energy, Insurance, and perhaps some of their other businesses. Leadership under these circumstances will continue to play an important role in navigating the company through generational changes in the way we live and think. While I am not in the camp (yet) that AI will uproot our very way of existence, I must admit it has already had a significant impact on some of the business we are evaluating or own/have owned. Ajit Jain’s honesty about issues at GEICO and potential challenges related to autonomous driving drives home the point that the future will not look like the past.
Now I’m not saying that these changes will damage Berkshire immediately, and I’m sure that the company will truck along just fine for a while. The walk of the convention floor proved that Berkshire is truly an incredible collection of businesses. But I do think most companies require leadership that is young enough and adaptable enough to deal with the changes that we cannot foresee. Further, being young enough implies that you will likely still be in leadership when your decisions come home to roost.
Singapore just experienced a transition in leadership with Lawrence Wong becoming just the fourth Prime Minister in the country’s history. He is part of the “4G” or fourth generation of leadership. 4G leaders are selected on several criteria, but age is one of them. Lawrence Wong is just 51 and has a long runway ahead of him to govern, set policy, and more importantly, to live with the consequences of that policy.
In the investing world, youth can be an advantage. Stanley Druckenmiller was made Director of Equity Research at Pittsburgh National Bank at just 25 years of age because his boss liked that young people had a clean slate and were open to new ideas. Similarly, and this is probably a terrible example, especially considering their track record, but Cathie Wood’s ARK research team is incredibly young. I don’t know their exact ages but just looking at their picture profile makes me (at 36) feel old. But it makes sense. If you’re promoting a tech, growth and innovation fund, who are you going to have do your research? 60-year-old value investors? Probably not. I think the decision to hire young at ARK is a great one, it’s all the other decisions they have made which are likely the problem.
Creative thinking when it comes to CEO selection has significant benefits. Owning a Ferrari has, for quite some time been described more like owning a piece of art on wheels than owning a car. Given that much of the process of creating a Ferrari engine is done by hand, the cost, and overall prestige, you can understand the saying. Thus, Ferrari investors were confused as to why in 2021 the company announced Benedetto Vigna, a physicist and expert in microelectromechanical systems, as CEO. However, I think it might be a deft decision. Whether or not you like it, the future of cars is electric (or at least Hybrid), and regulation and societal change will make this so. Ferrari must handle the transition to EV well and is set to launch its inaugural electric super car in 2025. So, who better to handle it than a relatively young (55 years old) outsider who is an expert in electric systems, semiconductors and owns 100+ patents.
Coming back to Berkshire, there are plenty of reasons to believe that the company will be just fine. After all, Jain and Abel already run day-to-day operations, and Todd Combs who is 53 has been put in charge of GEICO. Further the company is decentralized, and each subsidiary will likely have a mix of young and old leaders. The point is not to say that Berkshire is any trouble, but more to use them as a thought exercise into what the next generation of leadership should look like.
Spencer Stuart put out an interesting article last year about the ages of new CEOs in the S&P 500. The data is quite telling. Roughly 50 companies in the S&P 500 goes through a leadership transition each year. Overwhelmingly (~80%) of the new CEOs are promoted from within. The average age of departing CEOs tends to be ~62-64 and the incoming CEO tends to be in their mid-50s. However, there was some uniqueness in the data, as appointments in 2021 (covid) skewed older, 1 in 6 new CEOs were over the age of 60. Given the pandemic, it's fair to assume that boards wanted experienced hands at the helm. However, the hiring age dropped again in 2022 as things got back to normal, and boards took a more long-term view to succession.
The declining age of new CEOs makes sense to me (let’s see if the trend holds). You need a mix of certain elements to make a new CEO appointment work.
Experience but not too much experience so that it blocks innovation or new ways of thinking
Adaptability to deal with a future that is increasingly difficult to predict
Longevity to see multi-year or decade plans through
Certainly, you need other things like people skills, skin-in-the game, right incentives, etc, but these are all table stakes. In the end a good succession plan considers both the current and the future. With about 10% of the S&P 500 CEOs retiring each year, it will be interesting to map how boards manage succession.
Thanks for reading and happy investing.
Chart of the Week
The death of Google is widely exaggerated - Data from Bloomberg shows that search engines gained the most share of shopper’s attention in 2023 compared to other major channels. Marketplaces lost the most share. (source)
Links of the Week
Is history repeating itself? Tourbillon makes an argument that the Mag 7 is just too overpriced. Read the “Price of Magnificence” here.
On a similar theme, this articles argues that capex spend for big tech is coming at lower and lower returns.
A great thread on how Peter Lynch thinks about catching falling knives and avoiding the ones that will certainly cut you.
A reasonable argument about why Tesla and Apple will meet short-term headwinds (not investing advice).
Not investing related per se, but this thread is a fascinating visualization of Psychology and Life.
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