The "Oracle of Omaha" is two months away from "retirement," and Berkshire's "Oracle premium" is already gone.
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There are still two months until Buffett officially steps down as CEO, but Berkshire Hathaway's stock seems to have already felt his departure in advance.
This May, Wallstreetcn mentioned that 95-year-old Buffett announced at this year's shareholders meeting that he would hand over the CEO position at the end of the year to his personally chosen successor, Greg Abel, shocking investors.
Since then, Berkshire's Class B shares have dropped 11%, while the S&P 500 has risen 20% in the same period. Some analysts believe this partly reflects market concerns about how Berkshire will operate without Buffett.
(Since the shareholders meeting, the blue line shows Berkshire Class B shares down 11%, while the orange line shows the S&P index up 20%)
This transfer of power will also change several traditions at Berkshire. Reportedly, Abel will take over writing the annual letter to shareholders and preside over the Omaha annual shareholder meeting. Starting next year, while Buffett will remain as chairman, he will sit among the other directors.
Wall Street Starts Downgrading Ratings
Berkshire's stock underperformance relative to the benchmark index this year is the largest since 2020.
Analysts at Keefe, Bruyette & Woods recently downgraded Berkshire to "underperform, one of the few times the company has ever received such ratings, the last being before the 2008 financial crisis.
Analysts at the bank pointed out in their report that declining pricing in property catastrophe reinsurance is expected to drag down its insurance business, global trade frictions may affect railway business income, and falling interest rates may reduce returns on Berkshire's vast cash reserves. Buffett stepping down as CEO is also a potential drag on the stock price.
Meyer Shields, co-author of the report, stated:
Some people have great confidence in Warren Buffett, and for them, the investment rationale begins and ends with him.
Berkshire will announce its third-quarter earnings on Saturday US time.
Unique Operating Style Faces Test
Buffett’s excellent stock-picking record has built such deep trust among investors that the conglomerate has been able to operate at its own pace with little resistance.
When AI stocks are surging dazzlingly and there are almost no cheap assets in the market, Berkshire still insists on value investing. When other investors bought tech giant stocks in droves, Berkshire reduced its Apple holdings and increased cash reserves to a record $344 billion as of the end of June.
Different from most listed companies, Berkshire does not hold quarterly conference calls or provide financial guidance, and its financial statements are sometimes based on estimates and subjective judgments that can be a bit opaque to investors.
Some analysts say that once Buffett steps down, investors may not be as tolerant of these special practices, but whether Berkshire will provide more transparency is another question.
Buffett will still serve as CEO for two more months and continue to share his thoughts with the investment community. According to media citing Buffett's assistant, a Thanksgiving letter to his three children and shareholders will be released on November 10.
Careful Berkshire readers will remember that in the 2024 shareholder letter, Buffett has already outlined his plans:
At 94, it won’t be long before Greg Abel replaces me as CEO and writes the annual letter. Greg agrees with the Berkshire creed that the “report” is what the Berkshire CEO owes shareholders each year. If you start cheating shareholders, you will soon believe your own lies and cheat yourself as well.
Some on Wall Street Remain Confident
The day before Buffett announced his resignation, Berkshire's price-to-book ratio hit a multi-year peak of 1.7 times, well above its 10-year average of 1.3 times.
Chris Bloomstran, president of Semper Augustus Investment Group, said, Berkshire’s 6% rise this year still outperformed property and casualty insurers like Progressive, which is down 14% this year.
Bloomstran, who has attended the company’s annual meeting since 2000, increased his Berkshire holdings in recent months. He stated:
I don’t think the stock price drop was at all because of Buffett’s resignation announcement. Everyone I know in the Berkshire circle has only praise for Greg.
Henry Asher, president of Northstar Group, who has held Berkshire shares since 1988, has held onto his Berkshire stock during the recent decline. No matter whether Abel can match Buffett’s stock-picking record, Berkshire’s business will remain unchanged.
Asher said:
You’re not going to cancel your freight shipment with Burlington Northern just because Buffett isn’t there. With or without Buffett, these businesses will continue to produce huge cash flows.
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