5,500,000% return: How Warren Buffett became a Wall Street legend
Not surprisingly, for more than two years, instead of using the torrents of cash his group has generated to buy expensive companies or shares Buffett has been building a stockpile of cash. Berkshire Hathaway now has a hoard of $US347.7 billion (about $540 billion).
For Abel, how and when he deploys that cash will represent the major and reputation-defining challenge of his new role.
Abel is an operational guy, brought into Berkshire Hathaway when it acquired a stake in MidAmerican Energy in 1999. He built the energy business into a key pillar of the group's operating assets and now runs all Berkshire Hathaway's non-insurance operations, a portfolio of more than 180 operating companies that generated $US47.4 billion of Berkshire Hathaway's $US89.7 billion of first-quarter revenues.
He's a manager, not an investor, with Todd Combs and Ted Weschler, the executives responsible for identifying targets for investment. Once he replaces Buffett, however, it is Abel who will have to make the big calls.
Buffett has been a contrarian investor, often sitting on the markets' sidelines for considerable periods while waiting for opportunities – the 'straw hats in winter,' or counter-cyclical, approach that hardcore value investors pursue.
Loading
'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,' Buffett has said to explain his philosophy.
In 2008, during the global financial crisis, that strategy was vindicated. Berkshire Hathaway stepped in during the worst of the crisis to buy cheap stakes in companies like Goldman Sachs, General Electric and Dow Chemical, driving very hard bargains in exchange for the calming influence its money and Buffett's reputation provided.
Those sorts of opportunities don't, however, come that often.
Since the crisis, Buffett has been relatively quiet, Berkshire Hathaway's level of out-performance of the market has shrunk and its store of undeployed cash has soared, signalling that Buffett believes there isn't value in the market for either companies or shares in the current environment. His major play in recent years, unusually for a group largely focused on the US, has been the $US23.5 billion the group has invested in five of Japan's biggest trading houses.
Abel's challenge will be to find value and the moment to use that cash on deals that are large enough to move the dial in what is now a $US1.2 trillion conglomerate.
If Donald Trump's trade policies – his tariffs – were to push the US economy into recession, which is possible, that moment might arise.
There is a lot of leverage in the US system. During the near meltdown in the US bond market earlier this year after Trump made his 'Liberation Day' announcement of reciprocal tariffs, hedge funds were scrambling to exit leveraged trades and the market for leveraged loans froze.
There are a lot of highly-leveraged hedge funds and private equity firms out there that would be stressed if economic conditions deteriorated markedly, or interest rates were to rise – or both, if Trump induces, as some fear, a stagflationary recession.
'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.'
Warren Buffett
Buffett seems confident that those sorts of distressed asset sales will eventuate.
'We will be bombarded with offerings that we'll be glad we had the cash for,' he said at the weekend.
That could release a lot of the kinds of hard assets that private equity targets and Buffett has always liked: companies with good management, strong franchises, protective 'moats' and solid cashflows and earnings.
The big long-term holdings within Berkshire Hathaway's investment portfolio are companies like Amex, Coca-Cola, Bank of America and, while he was late to that party, Apple, but the core portfolio of operating companies is centred on insurance, utilities and energy, railroads, and a collection of manufacturers and retailers.
Whether those sorts of companies that have generally performed well in the past 60 years will generate similar performance in future is an open question.
Artificial intelligence is expected to transform companies and industries in ways that are difficult to predict.
Buffett's philosophy was to avoid companies and technologies he didn't understand, so he didn't invest in companies like Google, Amazon, Meta, Microsoft and only started investing in Apple – the star of the portfolio – in early 2016, nine years after Steve Jobs launched the first iPhone and transformed a company now worth more than $US3 trillion.
Abel will have to navigate the implications of AI for the post-Buffett investment environment if he is to continue Berkshire Hathaway's history of significant out-performance. Buffett could get away with a year or two of passivity or the odd poor investment; Abel won't be afforded that same level of shareholders' trust.
There will be pressure on him to do something big with Berkshire Hathaway's cash – big enough to have an impact on the group's returns – and there won't be tolerance for any mistakes when he does.
In many respects, Buffett has handed his successor a poisoned chalice.
No-one could deliver the Buffett package of extraordinary returns wrapped around his unique style and charisma – a personality cult that developed over decades – in an investing environment so different, and vastly more competitive, than when Buffett was mopping up hard assets at discounts to their book values, let alone their market values.
Abel may have to chart a new and different course for Berkshire Hathaway, as anyone who succeeded the man who created one of the world's biggest and most influential investment firms would have had to do.
Loading
Buffett, his decades of investment wisdom and his ability to see value where no-one else had, is, however, irreplaceable.
There is now a significant question mark over the eventual fate of the sprawling investment conglomerate he created that Abel, even while the counsel of the 94-year-old Buffett is still available, will find it very difficult to dispel.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Sydney Morning Herald
4 days ago
- Sydney Morning Herald
CBA is now worth over $300 billion, but the experts are cautious
Commonwealth Bank this week hit a new milestone when its market value broke through $300 billion, continuing to defy sceptical analysts who have long struggled to make sense of the gravity-defying rise in the banking giant's shares. CBA shares are up almost 47 per cent in the past year, and the bank's market value is on par with global powerhouses such as Wall Street titan Goldman Sachs. CBA's market value is far greater than the combined value of its two largest rivals: Westpac and National Australia Bank. The Sydney-based bank has also led a powerful sector-wide rally in bank shares: Citi analysts say banks have outperformed the ASX 200 by 27 per cent since the start of 2024. But despite the bank's bumper share price, which ticked up to $181.34 on Thursday, some analysts say they see a more subdued outlook for bank shares, pointing to pressure on profit margins from the expected fall in interest rates. Others are cautioning that after the surge in bank shares, investors should be aware of the possibility of a 'rotation' towards miners, the other major sector of the ASX. Loading Morgan Stanley analyst Richard Wiles on Thursday argued there were 'downside risks' to major bank share prices, saying various forces that supported the sector in 2024 were starting to fade. Wiles said that in particular, net interest margins (banks' funding costs compared with what they charge for loans) appeared to have peaked, while the outlook for dividends and buybacks was also more subdued. Wiles said the CBA's price-to-earnings multiple – a key measure of a stock's valuation – had hit 28 times, and this was 'very difficult to justify' given the outlook for CBA profit growth.
The Age
4 days ago
- The Age
CBA is now worth over $300 billion, but the experts are cautious
Commonwealth Bank this week hit a new milestone when its market value broke through $300 billion, continuing to defy sceptical analysts who have long struggled to make sense of the gravity-defying rise in the banking giant's shares. CBA shares are up almost 47 per cent in the past year, and the bank's market value is on par with global powerhouses such as Wall Street titan Goldman Sachs. CBA's market value is far greater than the combined value of its two largest rivals: Westpac and National Australia Bank. The Sydney-based bank has also led a powerful sector-wide rally in bank shares: Citi analysts say banks have outperformed the ASX 200 by 27 per cent since the start of 2024. But despite the bank's bumper share price, which ticked up to $181.34 on Thursday, some analysts say they see a more subdued outlook for bank shares, pointing to pressure on profit margins from the expected fall in interest rates. Others are cautioning that after the surge in bank shares, investors should be aware of the possibility of a 'rotation' towards miners, the other major sector of the ASX. Loading Morgan Stanley analyst Richard Wiles on Thursday argued there were 'downside risks' to major bank share prices, saying various forces that supported the sector in 2024 were starting to fade. Wiles said that in particular, net interest margins (banks' funding costs compared with what they charge for loans) appeared to have peaked, while the outlook for dividends and buybacks was also more subdued. Wiles said the CBA's price-to-earnings multiple – a key measure of a stock's valuation – had hit 28 times, and this was 'very difficult to justify' given the outlook for CBA profit growth.
The Age
6 days ago
- The Age
Why America may never be great again
America's government finances are about to get a lot worse. The 'One Big Beautiful Bill Act' currently before the US Senate, with its extension of Trump's 2017 tax cuts, would add more than $US3.3 trillion to that debt within a decade and (because the spending measures are front-loaded, with expenditure cuts deferred) about 1.8 percentage points to the US debt-to-GDP ratio in its first year. Concern about the increase in debt the bill would generate, along with the chaos created by Trump's tariffs, have already caused US bond yields to rise significantly and produced some weakness in demand in auctions of bonds with longer durations. Bond investors want to be compensated for the perceived increase in risk of holding bonds for 20 or 30 years. The demand versus supply challenge created by the sheer volume of debt the market is being asked to absorb is exacerbated by the changes to US bank regulation that were made after the 2008 financial crisis. Loading Dimon's reference to market makers relates to the requirement that banks hold capital and liquidity against risks, with Treasury securities treated no differently to other assets. In a crisis, and a big short falling demand for a US bond issue, the banks, as 'primary dealers,' would be expected to step up and fill the void, but those requirements might prevent them from doing so. The Trump administration has raised the prospect of bank deregulation, with the 'supplementary leverage ratio,' which requires banks to hold a minimum 3 per cent of common equity relative to their total assets, likely to be lowered. Dimon isn't the only senior Wall Street figure worried about the potential for an implosion in the bond market. Speaking at the same Reagan National Economic Forum in California as Dimon, former Goldman Sachs president and Trump adviser in his first term, Gary Cohn, said that the US has 'the most robust debt market in the world, until we don't.' 'If there lacks interest from foreign investors, and there lacks interest from US will move out dramatically. 'One or two auctions later, you could be in a completely different system. 'And then, when the government gets to a point where it can't efficiently finance itself, we have a completely different position. And when we're there, it's almost too late to deal with,' he said. The White House, of course, isn't concerned, arguing that growth from its tax cuts and spending will grow the economy at a rate will resolve the threat of rising deficits and debt and shrink the deficit and debt ratios. The Treasury Secretary, Scott Bessent, pushed back against criticism of the One Big Beautiful Bill Act impact on the deficits and debt. 'This bill is going to create growth. I'm not worried about the US debt dynamics because a change in the growth trajectory takes care of a lot of that, he said, predicting that, within a year, the US economy will be growing at more than 3 per cent. That might be somewhat optimistic. Trump's tariffs, if he is allowed by the courts to impose them, or finds other mechanisms for doing so, will subtract from growth. It is also the case that the $US4 trillion-plus of tax cuts aren't actually stimulatory cuts, but an extension of the 2017 tax cuts that were scheduled to expire in December. Their extension might avoid what would otherwise be contractionary tax increases, but it is stretching it somewhat to see them as turbocharging growth. There's also, given the nervousness of investors, particularly foreign investors, about the Trump administration's love of destabilising tariffs and the blow-out in government spending that would occur if the One Big Beautiful Bill is enacted, another potentially destructive element in the legislation. Section 899 of the bill would enable the US Treasury to impose penalties on foreign investors or companies by imposing punitive income and withholding taxes on them – up to 20 percentage points on their US investments – if the US deems their governments have imposed unfair taxes on US companies. Loading The European Union, the UK, Canada, Australia and others with valued-added taxes (our GST) or digital sales taxes would be obvious targets. Section 899 would apply to dividends, the interest on corporate (and possibly government) bonds and corporate profits and would also apply to the holdings of sovereign wealth funds that are currently exempt from taxes. There's already a 'Sell America' trade underway. Even as US bond yields have risen, the US dollar has fallen almost 10 per cent this year, a reversal of the normal correlation. Trump's trade wars and the expected spending binge and deterioration in America's public finances – a prospect that saw the US lose its last AAA credit rating last month – are the reasons there have been outflows of capital from the US this year. If Section 899 were enacted – or if foreign investors thought it was likely to be enacted – there would be a real exodus of capital from the US. Interest rates would spike even more and investment and growth would shrink. The prospect of US Treasury calling a bond auction where no-one turned up would strengthen. If no-one wants to buy US assets, or are scared away from the US markets and economy by the administration's policies, the dollar won't remain dominant and America will never be great again. Trump and his administration want to bully the rest of the world. They want to dictate other countries' trade, tax and social policies while still seeking their investment – indeed, demanding that they invest more – to 'make America Great Again.' They risk being shunned by the rest of the world and its capital, with unpleasant consequences for America's public finances, its economy and for the dominance of the US dollar that has underpinned the transmission of American power throughout the globe. Loading If no-one wants to buy US assets, or are scared away from the US markets and economy by the administration's policies, the dollar won't remain dominant and America will never be great again.
