What Amazon purchase tells us about Buffett’s succession plan

May 10, 2019 12:14
The succession plan of Warren Buffett and his partner Charles Munger has been a concern among Berkshire investors  Photo: Bloomberg

Billionaire investor Warren Buffett revealed during Berkshire Hathaway's latest annual shareholder meeting that the company has been buying Amazon shares.

Buffett said he wasn’t the one who pulled the trigger; it’s suspected that either Todd Combs or Ted Weschler who might be the manager behind the transaction.

"One of the fellows in the office that manage money ... bought some Amazon so it will show up in the 13F" later this month,” he told CNBC, referring to the quarterly report that institutional investment managers are required to file with the US Securities and Exchange Commission.

"The people making the decision on Amazon are absolutely [as] much value investors as I was when I was looking around for all these things selling below working capital years ago. That has not changed," Buffett said.

Buffett’s approval of the Amazon investment indicated that he has begun to appreciate the business model, the moat (competitive advantage) and the value of the leading e-commerce and cloud player.

In fact, Buffett has been expressing his admiration for Amazon and its chief executive Jeff Bezos, and admitted that he has been “an idiot” for not buying Amazon shares.

Still, for someone who do not even use a smartphone, it would be a bit of a stretch to understand the intricacies of Amazon and have a firm grasp of its value and business risks.

Shares of Amazon, which have been rising most of the time, didn’t give Buffett much of a chance to buy on weakness, something that he is particularly good at.

Meanwhile, Amazon’s price-earnings multiple of around 90 and 20 times price to book ratio isn't exactly the kind of valuation Buffett is accustomed to.

This is perhaps why such deals are now coming from his deputies.

Speaking of Berkshire's investment managers, Buffett said: "They are looking at things they feel they understand ... and they are absolutely following value principle.”

Considering Buffett's age, 88, and that his deputy Charles Munger, 95, as well as the growing dominance of tech firms in the investment space, we can probably expect more of Berkshire's investment decisions will be handled by younger managers under the careful watch of Buffett and his long-time partner to make sure Berkshire managers will continue to practice value investing and buying great companies at reasonable prices.

This is probably the kind of succession model the billionaire investor has in mind for Berkshire.

This article appeared in the Hong Kong Economic Journal on May 9

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist