The Oracle of Omaha said so himself in his latest annual letter to shareholders. For only the ninth time in 48 years, Berkshire Hathaway’s percentage increase in book value was less than the S&P 500‘s total return (or price appreciation plus dividends).
That “subpar” performance, as Buffett called it, has Berkshire Hathaway on the precipice of setting a dubious milestone, Buffett writes:
“To date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five-year wins will end.”
If you’re a believer in Buffett — and who isn’t? — then this is no more than a blip. Over time, the company will beat the S&P 500 and, by extension, the shares will too.
Heck, the stock is setting new all-time highs, with the Class A shares recently topping $153,000 a pop. It’s up more than 28% over the past 52 weeks, absolutely clobbering the S&P 500’s own 11% gain over the same span.
If the company’s own five-year streak does come to an end this year (and that seems likely), Buffett will surely get a pass. His eventual successor, however, won’t be so lucky.
If the company does lag the S&P 500 again, well … so what?
Berkshire Hathaway always does better in bad markets than good ones. And although the book value gains might be lagging, the stock price sure isn’t.
But mostly, no one will fret because Buffett’s still in charge. He’s more than proven that over longer stretches, Berkshire will increase its book value at a better clip that the broad market’s total return.
The scary part is what happens when Buffett, 82, is no longer around.
In some ways, the person who eventually succeeds Buffett at the helm of Berkshire Hathaway shouldn’t have too much trouble running the company in the way the Oracle saw fit. Buffett’s annual letters to shareholders, other writings, interviews and all the rest comprise an owner’s manual for running the sprawling enterprise.
But the successor will have to deal with something Buffett hasn’t had to face in many decades: Career risk.
By dint of temperament, experience, success (and having more than $50 billion to his name), Buffett has no fear. The new guy, however, will have nothing but pressure — and fear.
Buffett, for his part, can easily shrug off an impending five-year losing streak and stick to his guns. As he said in the annual letter:
“One thing of which you can be certain: Whatever Berkshire’s results, my partner Charlie Munger, the company’s Vice Chairman, and I will not change yardsticks … Charlie and I believe the gain in Berkshire’s intrinsic value will over time likely surpass the S&P returns by a small margin.”
Unlike the head of every other publicly traded firm, Buffett can afford to be patient — to manage the company for the long haul and not be whipsawed by Wall Street’s relentless quarter-by-quarter expectations.
The new guy won’t have it so easy. The comparison to Buffett will be relentless and almost impossible to match.
Thus, standing firm and maintaining long, Buffettonian horizons when Berkshire is lagging by book value or share-price performance will be brutally difficult. At the first sign of trouble, the pressure to overpay for acquisitions, buy back shares at prices that Buffett never would pay, or start paying a dividend, will grow.
Whether the new guy can resist that pressure will be the ultimate test — and the true mark of a worthy successor.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.