Warren Buffett’s impending retirement has triggered a significant stock underperformance for Berkshire Hathaway, even as the company sits on a record cash pile approaching $400 billion. Since the announcement of his departure, Berkshire shares have plunged 12%, while the benchmark S&P 500 has surged 20%.
Warren Buffett is discovering just how much value he brings to Berkshire Hathaway shareholders. The investing icon sent shockwaves through the business world in May when he announced he would step down as Berkshire’s CEO at the end of this year, concluding nearly six decades in charge.
Berkshire’s Class B shares had closed at a record $540 going into the company’s annual shareholder meeting. They have since plunged 12% to below $480. In stark contrast, the benchmark S&P 500 stock index has risen 20% to record levels above 6,800 points over the same period.
David Kass, a finance professor at the University of Maryland and longtime Buffett observer, noted that the underperformance reflects not only the “evaporation” of what is often called the “Buffett premium”—the extra value placed on the stock reflecting Buffett’s unique contributions—but also the stock getting ahead of itself before the meeting. He added that the simultaneous boom in AI stocks such as Nvidia and Microsoft drove the S&P to fresh highs.
Buffett’s departure should not be surprising, given he is 95 and has been planning a smooth transition for years. Nevertheless, he has become so synonymous with Berkshire that it is difficult to imagine the company without him at the helm.
End of an Era
When Buffett acquired Berkshire in 1965, it was a failing New England textile mill. Over the next 60 years, he transformed it into one of the world’s biggest companies, boasting roughly $400 billion in annual revenue, 400,000 employees, and a $1 trillion market value. Today, Berkshire is the largest shareholder of massive companies such as Coca-Cola and American Express, and fully owns scores of businesses, including Geico, Fruit of the Loom, and the BNSF Railway.
Greg Abel, Berkshire’s head of non-insurance operations, is Buffett’s chosen successor and will take the reins as CEO in the new year. While Buffett will stay on as chairman, Abel will assume many of his signature duties, such as writing an annual letter and hosting Berkshire’s yearly shareholder gathering.
Berkshire’s legendary CEO is leaving at a tricky time for the company. Its third-quarter earnings showed a 34% year-on-year surge in operating income to $13.5 billion, fueled by insurance underwriting income nearly tripling to $2.4 billion, as well as foreign-currency gains.
However, Buffett and his team sold more stocks than they purchased, making Berkshire a net seller for a 12th consecutive quarter. They also refrained from repurchasing any shares, marking a fifth straight quarter without buybacks. The result was that Berkshire’s cash pile hit yet another record, reaching $358 billion after subtracting Treasury payables.
The simple reason for this cash buildup is that Buffett is a bargain hunter, and bargains are few and far between when stocks are at record highs, private equity firms are driving up the cost of acquisitions, and Berkshire stock is still trading near all-time highs despite its recent slump.
Buffett Sold Apple Before It Surged
While struggling to find compelling purchases, Buffett has found plenty of things to sell. He has now pared two-thirds of Berkshire’s biggest stock position, Apple, since 2023.
Berkshire roughly quadrupled its money on paper between 2018 and 2023, having paid around $36 billion for a roughly 5% stake that was worth over $170 billion by early 2023 as Apple stock boomed.
But if Buffett and his colleagues had not sold, their Apple holding would be worth over $240 billion today, or more than six times what they paid. Apple shares have spiked by a third in just the past three months, reaching fresh highs thanks to renewed iPhone and AI optimism.
Berkshire clearly “left a lot of money on the table,” Kass said. However, he added that the disposals could still “prove to be prescient” if there is an AI bubble and tech stocks crash.
A Twilight Deal
Berkshire did manage to strike a deal during Buffett’s final months in charge. In early October, it agreed to acquire OxyChem, Occidental Petroleum’s chemicals business, for $9.7 billion in cash. Berkshire is already Occidental’s largest shareholder with a more than 25% stake.
Darren Pollock, a portfolio manager at Cheviot Value Management, noted that shareholders love to see Berkshire putting its cash to work. But he called the $10 billion deal a “drop in the bucket” that will barely put a dent in Berkshire’s war chest, as the company generates that much cash in a quarter or two.
It is worth noting that cash has been less of a headache for Berkshire since the Federal Reserve hiked interest rates following the pandemic. The company earned over $17 billion of interest, dividend, and other investment income during the first nine months of this year—a significant jump from the $7.5 billion it earned over the whole of 2021 when rates were close to zero.
Berkshire Beyond Buffett
Berkshire’s lagging stock price, ballooning cash pile, questionable Apple sales, and a prolonged bargain drought make this a challenging time for Buffett to leave the stage.
But leaving Abel with almost $400 billion in dry powder could be the ultimate gift. Kass stated that eventually a recession will strike, stocks will tumble, and the trio of Abel and Berkshire’s two investment managers, Todd Combs and Ted Weschler, will be “well positioned to invest Berkshire’s ever-growing cash pile at very attractive prices.”
He added that Berkshire’s outlook appears “extremely bright,” its operating businesses are “very close to firing on all cylinders,” and its balance sheet is “second to none.”
“Greg is the right person at the right time to lead Berkshire forward,” Kass concluded.
