Berkshire investors would do better if the firm was broken up. It’s time for Warren Buffett to step aside

It’s time for Warren Buffett, 92, to retire as CEO of Berkshire Hathaway Inc. and let a successor get on with dismantling the world’s largest conglomerate.

Last weekend, Berkshire reported an enormous loss in 2022 of $22.8 billion (U.S.) on $302 billion in revenues. That is not the first time in recent years that Berkshire’s profits have collapsed.

And Berkshire’s stock performance has trailed the market averages for the past two decades.

The stock market always applies a discount to conglomerate stocks, because routinely the stars in a conglomerate’s holdings are dragged down by the dogs.

Last year at Berkshire, impressive gains in its power utilities business were outweighed by huge losses in its stock portfolio, reversals in some of its insurance units, and bad bets on derivatives.

Berkshire investors would do better if the firm was broken up, a process Wall Street calls “unlocking shareholder value.”

The market currently values Berkshire at $669 billion.

The collective value of Berkshire’s components if the company spun off its hundreds of diverse enterprises would be closer to $800 billion.

Conglomerates went out of style in the 1990s, with the dismantling of BCE Enterprises, EdperBrascan and Canadian Pacific Enterprises. Their components thrived as standalone companies.

More recently, Bombardier Inc. finally achieved viability as a focused maker of private jets after shedding its diverse albatrosses.

Canadian Pacific Railway Ltd. and Canadian National Railway Co., both formerly yoked to conglomerates, each outperformed Berkshire’s BNSF Railway last year, increasing their profits while BNSF’s financials weakened.

As noted, major setbacks have become a norm at Berkshire.

In 2018, Berkshire’s profit plummeted by 91 per cent. In 2020, it fell by 48 per cent.

And Berkshire stock has underperformed the S&P 500 over the past five, 10 and 20 years.

No one today would build a jumble of companies like Berkshire, which came about somewhat by accident.

During the prolonged stock-market slump of the 1970s and early 1980s, Buffett was able to buy corporate assets on the stock market for 50 cents on the dollar.

Then the market roared back to life, the value of Buffett’s acquisitions skyrocketed, and the niagara of cash they produced had to be reinvested. Berkshire grew like Topsy.

In the past 20 years, though, bargains have been hard to find in an overvalued stock market.

Berkshire has a succession plan. Greg Abel, a Berkshire vice-chair, is Buffett’s current heir apparent. But Buffett has lost faith in previous likely successors.

Meanwhile, Buffett clings to a job that enables him, like Zeus, to cast thunderbolts across the economy with his massive acquisitions and big bets in the stock and derivative markets.

And Buffett and his long-time partner, Berkshire vice-chair Charlie Munger, 99, make those decisions on their own.

The board of the Buffett-controlled Berkshire is stacked with Buffett appointees, including his son Howard and daughter Susan.

Any CEO would struggle to maximize performance at all of Berkshire’s 300-plus businesses.

They include gas pipelines, candy, aircraft components, Dairy Queen, interstate truck stops, Duracell batteries, movie distribution, computer equipment, Benjamin Moore paints, and furniture and apparel brands.

And a renowned stock investor who left Berkshire exposed to last year’s stock-market rout is difficult to regard as risk-averse, which Buffett declares himself to be.

It’s too easy to find companies with better 10-year stock performances than Berkshire, whose shares have almost tripled in value since 2013, or up by 195 per cent.

Investors would have done better with Google parent Alphabet (up 350 per cent), Montreal computer services provider CGI (up 347 per cent), or Vancouver yoga-togs merchant Lululemon Athletica (up almost 400 per cent).

Berkshire’s shares would trade a bit lower than their current price if Berkshire hadn’t spent upward of $60 billion buying back its shares over the past two years, inflating their value.

Buybacks are controversial of late, with Ottawa and Washington angered that the money isn’t instead reinvested in job-creating expansion or innovating R&D.

Buffett is impatient with buyback critics, who in the main are “economic illiterates” or “silver-tongued demagogues,” he says in his latest chairman’s letter to shareholders.

Not coincidentally, U.S. President Joe Biden is asking Capitol Hill to quadruple the levy on corporate share repurchases. Ottawa is planning its own levy on share buybacks.

Berkshire fans complain that Buffett’s letters have been getting shorter and less detailed and folksy in recent years.

In his latest letter, Buffett does reflect on his 58 years of investing, allowing that he has made only “about a dozen truly good decisions.” And that otherwise his capital allocations during that span have “been no better than so-so.”

The inevitable dismantling of Berkshire, to surface the true value of its components, is too arduous a task for Buffett. The way to prove that his modesty is not false is to step aside to let that investor-friendly process begin under new Berkshire leadership.