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The bearish case against Berkshire Hathaway: Succession

Berkshire Hathaway CEO and Chairman Warren Buffett speaks during an interview with Liz Claman of the Fox Business Network, in Omaha, Neb., Monday, May 6, 2013. The Berkshire Hathaway shareholders meeting took place over the weekend.

Nati Harnik/AP

At Berkshire Hathaway Inc.'s shareholder meeting last weekend, a short seller of the company's shares was invited to question Warren Buffett, 82, and Charlie Munger, 89. Did the two investing legends parry the thrusts? I'm not so sure they did.

The short seller was Douglas Kass, president of Seabreeze Partners Management Inc. He expressed concern that Berkshire would likely struggle after Mr. Buffett retires. The response was that Berkshire is like a brand: it snares good deals because troubled companies come to it for financial backing.

True, but someone has to decide which supplicants are actual bargains and which are value traps. Messrs. Buffett and Munger have been in a class of their own when it comes to making this distinction. It's hard to see how this intangible skill-set can be easily replicated.

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Second, Mr. Kass wondered if Berkshire was getting too big to grow at a rate that generates stock gains better than an index fund. Mr. Buffett acknowledged that the size of his company makes it tougher, and that Berkshire lately has been paying up for acquisitions. But he noted the purchases were not getting pricey, and returns should still be "satisfactory."

Perhaps so, but this doesn't specifically address the question of Berkshire doing well enough to outperform the market. Trying to move the needle with larger and larger acquisitions gets increasingly harder; hunting for "elephants" brings mature and slow-growing entities into the fold.

Third, Mr. Kass was skeptical of Mr. Buffett's son having enough business experience to be Berkshire's non-executive chairman. Mr. Buffett said his son's job would not be to run the company but to decide, along with the board, if the CEO should be turfed.

It seems to me this responsibility still requires a certain level of business experience. Can the son adequately assess the CEO's performance when he himself hasn't run a large company or made large investments? There are times when CEOs' strategies may inflict short-term pain for long term gain: Will Mr. Buffet's heir be able to tell the difference between transitory and long-term underperformance?

Larry MacDonald is a retired economist who manages his own portfolio and writes on investing topics. He tweets at @Larry_MacDonald

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