Warren Buffett steps down as chairman of Berkshire Hathaway; Berkshire's discount to intrinsic value today; Is Buffett's son qualified to succeed him?; Seven factors that explain Buffett's success

1) Breaking news this morning: After 61 years, Warren Buffett has stepped down as Berkshire Hathaway's (BRK-B) chairman.

As usual, he made the announcement in a beautiful letter to shareholders:

Berkshire has an extraordinary group of shareholders. From the beginning, Charlie [Munger] and I looked for owners who thought in decades rather than quarters, and we were fortunate to find a great many of you.

Recently, I celebrated my 96th birthday with family and friends, including one of my great-grandchildren, who had just turned one. He's moving a bit faster than I am these days.

I have served Berkshire since 1965. Sixty-plus years in, I still have the best job in the world. That is not something many people my age can say, and I have never felt better about what comes next.

Part of the reason is Greg [Abel]. My expectations for him were sky high from the start, and he has exceeded them. He has taken hold of the Chief Executive Officer job in every respect. He has been making the decisions that matter for some time now, and I have not had to think twice about any of them.

So the timing is right to complete the transition. I will become Chairman Emeritus and remain a Director. My son, Howard, will succeed me as Chairman.

Howard has been a Berkshire Director for 33 years. That is a longer apprenticeship than I served before taking the reins at the age of 34. Greg runs the company; Howard will guard its culture and values – both worth more than anything on our balance sheet. Think of Howard as a policy the shareholders own and hope never to claim against.

Howard cares deeply about Berkshire, as do all of our Directors. No company has been or will be more shareholder-minded than Berkshire.

Serving as your Chairman has been the privilege of a lifetime, and I have never taken your trust for granted. Father Time always wins. He has, however, been generous with me. He has given me the opportunity to see Berkshire reach a point where I am more confident than ever about what lies ahead. The company is in excellent hands, and I look forward to remaining a shareholder alongside you.

My only hope is that today's announcement wasn't triggered by a health problem.

While this news marks the end of a magnificent era, it wasn't unexpected – Buffett told shareholders long ago that his son Howard would succeed him.

And this has no impact on the company. Greg Abel has been running Berkshire since he took over as CEO at the beginning of this year, and Buffett remains on the board.

2) Today's news also has no impact on the company's intrinsic value, which I most recently discussed in my August 11 e-mail. At the time, I calculated that Berkshire was worth $855,000 per A-share (BRK-A) and $560 per B-share.

Since then, the market and Berkshire's stock portfolio are roughly flat, so my valuation estimate remains the same.

But A-shares are trading 4% lower since then, at around $762,000 this morning. So its discount to intrinsic value has widened from 7% to 11% – making the stock look even more attractive.

My conclusion from back then hasn't changed:

I'm especially bullish because in addition to today's discounted stock price, I'm optimistic that new CEO Greg Abel can create value via operational improvements and capital allocation...

This combination leads me to believe that Berkshire's stock is highly likely to beat the S&P 500 over the next five years, perhaps by a margin of two to three percentage points. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 7% to 8% – with a bias toward the upside.

In December 2023, my Stansberry's Investment Advisory team and I recommended Berkshire's B-shares when they were trading at a 14% discount to intrinsic value. Subscribers who followed our advice since then are up 44%.

When you subscribe, you get immediate access to our full report on Berkshire and our specific buy advice. You also get our archive of past issues, our portfolio of open recommendations, and our best new stock idea each month.

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3) Here's a story in today's Wall Street Journal about Buffett's son: Who Is Howie Buffett, Berkshire Hathaway's New Chairman?

Is Howard Buffett qualified to be chairman of Berkshire? My friend Doug Kass of Seabreeze Partners asked Buffett and Munger this very question at the 2013 annual meeting. (Here's a YouTube video – Doug's question is around the 20:14 mark.)

Doug also sent around a transcript of the exchange in an e-mail today. Here's how he posed the question to Buffett:

Someday your son, Howard, will become Berkshire's non-executive chairman. Berkshire is a very complex business, growing more complex as the years pass. Howard has never run a diversified business nor is he an expert of enterprise risk management. Best as we know, he hasn't made material stock investments nor has he ever been engaged in taking over a large company. Away from the accident of birth, how is Howard the most qualified person to take on this role?

Buffett responded:

Well, he is not taking on the role you describe. He is taking on the role of being non-executive chairman in case a mistake is made in terms of who is picked as CEO. I think the probabilities of making a mistake are low but they are not zero in a hundred. And I have seen such a mistake made in other businesses.

It is not his job to run the business, allocate capital, or do anything else. If a mistake is made in picking the CEO having a non-executive chairman who cares enormously about preserving the culture and taking care of the shareholders of Berkshire – not running the business at all – it will be far easier to then make another change.

Howard would be there as a protector of the culture, and he has got an enormous sense of responsibility about that. He has no illusions at all about running the business. He would have no interest in running the business. He will not be running the business at all. He won't get paid for running the business. He only has to think about whether the board may need to change the CEO.

I have seen many, many times over 55 years as a director, at times when a mediocre CEO is likable, not dishonest, but not the right person. It's hard to do when that person is in the chairman's position. It's a bit easier now that you have the procedure that the board meets once a year without the chairman.

Buffett concluded:

An example I have used in the past: "Blessed are the meek for they shall inherit the earth." But after they inherit the earth will they stay meek? That could be a problem. The CEO could be a position where someone throws his weight around in various ways.

You may have noticed that in our annual report, in terms of our newspapers, I said I'm not going to tell them who I endorsed as president (I voted for Obama). When I write that sort of thing, I am trying to box in my successor to some degree, too. We do not want someone to use Berkshire Hathaway as a power base in the future. We want the CEO to think about the shareholders.

4) It's an appropriate day to reflect on how the greatest investor of all time built his extraordinary track record and what lessons there might be for ordinary investors.

So I want to share a summary of the "seven factors that explain Warren Buffett's success," which I first published in my August 31 e-mail:

First, he's a genius – an investing savant. He regularly astounds people by recalling details about companies (revenues, profits, etc.) that he hasn't looked at in decades.

Second, he lets the magic of long-term compounding work for him. Buffett bought his first stock at age 11, so he has been investing for 85 years...

Third, Buffett got on a steep learning curve and never got off it. At age 60, he was already worth $3.8 billion. But when most people would have retired, he kept doing what he loved – and 94% of his wealth has been accumulated in the past 36 years.

Fourth, he has always been comfortable standing apart from the investing "herd" – in part because that's the way he's wired, but also in a literal sense...

Fifth, Buffett held on to his Berkshire stock when he closed his hedge fund, Buffett Partnership, at the end of 1969. This was critical because during times of turmoil, it meant he was never forced to sell to cash out panicky limited partners...

Sixth, he recognized the power of marrying insurance businesses with his investing acumen early in his career...

Lastly, and as I've advocated many times, Buffett let his winners run.

Like I concluded back then, Buffett's career is a fountain of important lessons that I think every investor can learn from.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

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