Legendary investor Warren Buffett renewed speculation about who will replace him at Berkshire Hathaway Inc., saying Thursday in his annual shareholder letter that he plans to hire at least one young investment manager to help succeed him.
To replace Buffett, Berkshire plans to split his job into two parts — chief executive officer and chief investment officer. The company’s board of directors approved a plan in October to hire one or more candidates for the job of CIO, so Berkshire will be ready when Buffett can no longer work.
The Omaha-based holding company also reported a 29.2 percent jump in net income in 2006, as its insurance companies were helped by a lack of hurricanes. Berkshire reported making $11.02 billion in 2006, or $7,144 per share, up from $8.53 billion, or $5,538 per share, in 2005.
Buffett said last year that Berkshire’s board had three outstanding internal candidates for chief executive, and the board knows “who should take over if I should die tonight.” Each of those candidates is significantly younger then the 76-year-old Buffett.
But the “Oracle of Omaha” said this year that Berkshire is not as well-prepared for a successor on the investment side of the business. He said those who might replace him on the investment side are too close to his own age to do it for very long.
Lou Simpson, 70, who manages Geico’s investment portfolio, would “fill in magnificently for a short period,” Buffett said.
But Buffett also tried to reassure shareholders about his health.
“The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health,” Buffett said. “It’s amazing what Cherry Coke and hamburgers will do for a fellow.”
Morningstar analyst Justin Fuller said Buffett’s plan to seek a new, younger investment manager makes sense.
“It doesn’t necessarily make sense to replace a 76-year-old man with a 70-year-old man, right?” Fuller said
Whoever Berkshire hires as an investment manager may be able to help put the company’s $38.3 billion cash to work. The amount of cash the company held at the end of the year is down slightly from the $42.25 billion it held at the end of the third quarter.
Fuller said shareholders should be glad Buffett is thinking about a successor at the company with total assets of $248.4 billion that he built from a 1956 partnership of four relatives and three close friends.
“I think the fact that he’s thinking about it, and he’s doing something about it should certainly be comforting to investors,” Fuller said.
Picking the right person won’t be easy, Buffett said, because they’ll have to have the right qualities and Berkshire needs to be able to retain its choice. Berkshire may hire several candidates for the job.
“It’s not hard, of course, to find smart people, among them individuals who have impressive investment records,” Buffett said. “But there is far more to successful longterm investing than brains and performance that has recently been good.”
He said the right person must be able to think independently and recognize and avoid serious risks. Emotional stability and a keen understanding of human and institutional behavior are also important.
Hanging onto an investment manager could be difficult, Buffett said.
“Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager,” Buffett said. “We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere.”
Andy Kilpatrick, stockbroker-author of “Of Permanent Value, the Story of Warren Buffett,” said he’s confident Buffett can find the right person because of his track record.
“He always seems to pick the right person for the right job,” Kilpatrick said.
Buffett appears to be thinking long term about who should take over the company, Kilpatrick said.
Berkshire has said that it lost about $3.4 billion to hurricanes Katrina, Rita and Wilma during 2005. And last year Buffett said that Berkshire’s insurance companies would charge more for megacatastrophe policies after the hurricane losses.
The 2006 results look good by comparison.
“Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation,” Buffett said in his annual letter to shareholders. “After hammering us with hurricanes in 2004 and 2005 — storms that caused us to lose a bundle on super-cat insurance — she just vanished. Last year, the red ink from this activity turned black, very black.”
During the fourth quarter, which ended Dec. 31, Berkshire made $3.58 billion, or $2,323 per share. That is down 30.2 percent from the year-ago period when Berkshire made $5.13 billion, or $3,330 per share.
Berkshire’s fourth-quarter 2005 results were helped by a one-time $3.25 billion after-tax gain when its Gillette Co. stock was exchanged for Proctor & Gamble Co. stock.
The three analysts surveyed by Thomson Financial expected fourth-quarter earnings per share of $1,452.36 on average and annual earnings per share of $5,667.03 on average.
Berkshire’s Class A shares are the most expensive U.S. stock, and they have traded above $100,000 a share since last fall. The stock gained $410 Thursday to close at $106,600 before Berkshire’s earnings report was released
Buffett said Berkshire gained $16.9 billion in net worth during 2006, which represents an 18.4 percent jump in the per-share book value of the company. That’s better than the S&P 500’s 15.8 percent increase in value during 2006.
Berkshire owns more than 60 companies, including insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.