George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.
There has been a lot of speculation over the years about when investment icon Warren Buffett will retire, whether he is preparing for transition (which he has been) and, if so, when he will announce his successor. There is also concern in the markets about what will happen to Berkshire Hathaway Inc. stock after Mr. Buffett retires.
Mr. Buffett has kept his cards close to his chest. He has recently said that his successor has been chosen and that it is someone who already works for the company. But that is all he has said. Should we believe it, as Mr. Buffett always leaves the door slightly open for changing his mind?
This time, however, it may be different. In my opinion, not only has Mr. Buffett truly found a successor, but he has already passed a lot of Berkshire Hathaway's stock-picking decisions on to this person. The recent investments in Apple Inc. and four U.S.-based airlines do not appear to be Buffett-like investments.
Why the "shocking" reversals? It is because, in my opinion, Mr. Buffett is not making them. I truly believe that Mr. Buffett had passed on the torch to his successor. It is the end of an era.
But let's examine more closely Berkshire Hathaway's recent investments.
First, there is the purchase of a stake in Apple. One of the key principles that Mr. Buffett has discussed over the years is that one should invest in companies which are within one's circle of competence. An investor should understand a company's business, and if they don't, they should stay away from investing in the company's stock. Mr. Buffett has repeatedly said that he does not understand technology. But even if he did, Mr. Buffett likes to invest in companies that possess sustainable competitive advantage.
Does Apple have what it takes? In my opinion, the competitive advantage for Apple was the late Steve Jobs. Mr. Jobs is difficult to replicate. And so, there is a management impairment in Apple after his passing. Value investors believe that excellence in management has already been discounted in the stock's price, and the only direction for the stock price is down, unless the company has rigorous and well-thought-out succession planning and transition planning programs in place.
Transition planning was not one of Apple's strong suits when Mr. Jobs was around. Maybe Apple is a value stock, as its price-to-earnings ratio (PE) is around 13 times, very close to what value investors would consider a stock to be possibly undervalued.
But as old hands say, the riskier technology companies are those with low PE when the spark is gone, and to me the spark for Apple was Steve Jobs. Apple did not invest, it innovated. The driver of innovation was Steve Jobs. Consumer tastes are fickle. Consumers will gravitate towards the sexiest and cooler products irrespective of the brand. Can Apple continue to be in the forefront of technology and innovation without Mr. Jobs? I doubt it.
Second, there is the purchase of a stake in four major airline companies – American Airlines, United Continental Holdings, Delta Air Lines and Southwest Airlines.
Mr. Buffett has shunned the airlines industry for decades following his disastrous investment in US Airways back in 1989. In 2007, he explained his reasoning against investing in airlines. "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down."
In another interview he gave to The Telegraph in 2002, which was discussed in a 2010 Bloomberg BusinessWeek article, Mr. Buffett summarized his dislike of airlines as follows: "You've got huge fixed costs, you've got strong labour unions, and you've got commodity pricing." He went on: "I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say, 'Hi my name is Warren and I'm an aeroholic,' and they talk me down."
But beyond Mr. Buffett's comments, in general, airline stocks are not investments that value investors would readily make. Airline companies have high business and financial risk – a deadly combination. As a result, during recessions, the question is not if an airline will go bankrupt, but which one.
So is Mr. Buffett still making Berkshire Hathaway's stock-picking decisions? You should be the judge.
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