{"id":404032,"date":"2010-03-08T12:42:00","date_gmt":"2010-03-08T17:42:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-4190934837523991759"},"modified":"2010-03-08T12:47:18","modified_gmt":"2010-03-08T17:47:18","slug":"motley-fool-idiot-proofing-berkshire-hathaway","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/404032","title":{"rendered":"MOTLEY FOOL: Idiot-Proofing Berkshire Hathaway"},"content":{"rendered":"

By Alex Dumortier, CFA <\/span><\/p>\n

March 8, 2010<\/span> | <\/a><\/span> <\/p>\n

I’d love to be able reveal the next CEO of Berkshire Hathaway<\/strong> (NYSE: BRK-A<\/a>)<\/span> (NYSE: BRK-B<\/a>)<\/span> — that would be quite a scoop — but I can’t. However, preparing for the post-Buffett Berkshire is more than simply selecting an operating CEO and a CIO (chief investment officer). I think the shift toward <\/a>highly capital-intensive businesses<\/a> that Buffett highlighted in his most recent shareholder letter is another part of that process. Let me explain. <\/p>\n

They need lots of cash<\/strong>
Berkshire doesn’t break out capital expenditures by subsidiary company, so I used some publicly traded peers to highlight the significant investments some of its more recently acquired companies require:<\/p>\n\n\n\n\n\n\n
\n

Berkshire Hathaway Company<\/strong> <\/p>\n<\/th>\n

\n

Publicly Traded Peer<\/strong> <\/p>\n<\/th>\n

\n

Capital Expenditure \/ Operating<\/strong>
Cash Flow (2009)<\/strong> <\/p>\n<\/th>\n<\/tr>\n

\n

Burlington Northern Santa Fe<\/p>\n<\/td>\n

\n

Union Pacific<\/strong> (NYSE: UNP<\/a>)<\/span><\/p>\n<\/td>\n

\n

76.8%<\/p>\n<\/td>\n<\/tr>\n

\n

Marmon Group<\/p>\n<\/td>\n

\n

General Electric<\/strong> (NYSE: GE<\/a>)<\/span><\/p>\n<\/td>\n

\n

35.1%<\/p>\n<\/td>\n<\/tr>\n

\n

MidAmerican Energy<\/p>\n<\/td>\n

\n

Exelon<\/strong> (NYSE: EXC<\/a>)<\/span><\/p>\n<\/td>\n

\n

53.7%<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: Capital IQ, a division of Standard & Poor’s.<\/span> <\/p>\n

Buffett has spent a lifetime building Berkshire Hathaway, “a sweeping canvas that is his masterpiece,” in the words of his biographer, Alice Schroeder. While he takes a hands-off approach to the running of Berkshire’s subsidiary companies, one of his critical roles is capital allocation — deciding what to do with the enormous gobs of cash these companies generate (in the 12 months to Sep. 30, 2009, Berkshire free cash flow was $6.2 billion).<\/p>\n

Idiot-proofing Berkshire Hathaway<\/strong>
Shifting toward capital-intensive businesses and accepting “decent returns” (Buffett’s words) over outstanding ones<\/a> is Buffett’s solution to the problem of Berkshire’s size<\/a> — quite simply, there are fewer external opportunities to reinvest Berkshire’s cash that will make a difference to its bottom line (Microsoft<\/strong> (Nasdaq: MSFT<\/a>)<\/span> has the same problem). But I think Buffett’s rationale may go further than that. Increasing Berkshire’s internal cash requirements is a means of protecting his “masterpiece,” by reducing the risk that his successor will make ill-considered investments with the cash.<\/p>\n

Buffett’s once quipped: “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” Embracing capital-intensive companies may an effort to mitigate that risk within his own enterprise.<\/p>\n

Warren Buffett is simply playing with too much money to invest in small-cap stocks, but you aren’t. Anand Chokkavelu highlights the home run stock that Buffett can’t buy<\/a>.<\/em><\/p>\n

Share Investor Links<\/span><\/a><\/a><\/p>\n

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Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders<\/span><\/a>
Download the 1977 – 2009 Warren Buffett Letter’s to Berkshire Hathaway Shareholders<\/span><\/span><\/a><\/p>\n

Recommended Amazon Reading<\/span><\/p>\n