×

Yoshikami: Warren Buffett Begins His Exit

Warren Buffett
Getty Images
Warren Buffett

Warren Buffett's annual letter this week covered many topics.

But perhaps the most telling passage discussed the very clear successionplan laid out by the Oracle of Omaha.

And while he is quick to point out in his narrative that he feels just fine and has no plans to leave anytime soon, one can only conclude from his latest letter that he recognizes the time is near for him to move to the sidelines and let others take over to write the next chapter for Berkshire Hathaway .

Recognize that Warren Buffett is not done with investment strategy or chasing timely acquisitions. Investments in IBM and Bank of America reflect Warren Buffett's philosophy; market-leading companies and damaged institutions willing to pay high interest for a Berkshire Hathaway endorsement. And I would expect to continue to see other types of acquisitions in the next 12 months.

Don't expect all corporate acquisitions to focus simply on the United States. There's a reason why Warren Buffett was singing for the Chinese in the Year of the Dragon; he knows the future of Berkshire Hathaway must include China and I'm confident that message is resonating with all who work in Omaha. And one can only conclude that the international focus for future investments will be understood by whoever leads Berkshire Hathaway in the future. It's as if Warren Buffett is setting up the vision for the next 40 years for the company and laying the groundwork for the next CEO.

Buffett went to great lengths to describe the enthusiasmof the board of his secret choice to run Berkshire Hathaway. This is uncommon to say the least as it is typical for CEOs to outline the succession plan in place but not to announce a successor has already been chosen. Perhaps Buffett has heard the drumbeats from critics saying that a company so dependent on his investment wisdom needed to be more explicit about what a post Buffett future looks like for Berkshire Hathaway. Yes, he has two portfolio managers in place, Todd Combs and Ted Weschler, to help run existing segments of the Berkshire Hathaway portfolio. But despite these manager additions, investors want to know who will ultimately run Berkshire Hathaway.

So who will be the next CEO?

My bet is on Ajit Jain. My speculation is that this will be the core leader of the overall portfolio strategy watching over the cash cow of the business, the reinsurance division. Then, by layering in other portfolio managers, value can be found outside of core holdings. Essentially, I see Berkshire Hathaway now moving towards an institutional model with sub-portfolio managers. In some ways this will look like mutual fund managers that have been prbufovided a portion of the portfolio to manage all expected to provide excess returns over benchmarks. And the party likely to oversee the entire process, while at the same time managing the cash cow reinsurance business, will likely be Ajit Jain. I have no special knowledge of Warren Buffett's plans or thinking but after watching this company carefully for many years, it seems like a logical choice to me.

It would seem that Buffett recognizes no one person can replace them. And frankly given the rarity of an investment visionary like Warren Buffett, that might be a wise conclusion. Perhaps Buffett is making a statement to investors that should be obvious to all; excess performance by one person on a continuous basis is more the fluke than the rule. And cautious Warren Buffett is setting up Berkshire Hathaway to reflect that perspective.

So, is it time to sell Berkshire Hathaway?

No, we think not. Though the company has underperformed theS&P 500over the last 12 months, its book value still seems relatively reasonable. And I suspect that Warren Buffett is not done writing the last chapter in his storied investment career. But it is time to recognize that Berkshire Hathaway is about to transition into a more institutional model and one that is different from the last 40 years. It doesn't mean Berkshire Hathaway is a sell but it does mean investors must recognize that buying this company today is essentially buying an institutional investment model for the long-term.

There's nothing wrong with that; it simply different than the Berkshire Hathaway investors have known for the last four decades.

Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Michael is a CNBC Contributor and appears regularly on the network. YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.