Irreplaceable Warren Buffett Isn't Basis for Investing
However, if your long-term outlook is that the end of the Buffett era at Berkshire implies a lower valuation and less growth from operating businesses, there could be an enormous haircut to the value of the stock. The shares could become attractive at that point in time, but the damage has to be done first.
Rolfe takes a different view of the final Buffett succession headline sequence. The first headline will say Buffett is stepping down as active CEO, the second line will name the new CEO, and the third line will announce a Berkshire Hathaway dividend. For Rolfe, the dividend is the difference between a dip and real damage.
The buyback argument, anyway, is ultimately about valuation and succession is merely the trigger. "The two issues keeping us from buying are succession and valuation," Shields said.
Shields is at a hold on Berkshire today because of the limited upside he sees in shares. He said what keeps Stifel from a sell or buy rating is not price to book ratio, though, but Berkshire's price to book multiple compared to the S&P 500. It's trading below its historical average -- about 10% below -- but that's not enough to get excited about, even if there isn't much downside from there.
Wedgewood's Rolfe has more conviction on that lack of downside. He says when you consider what could go wrong with prostate cancer -- the statistics suggest that it will not be life-threatening for Buffett, as Buffett said himself -- versus what could go right for Berkshire Hathaway, the choice is obvious.
"There is enough organic growth here at the present valuation that risk versus reward is asymmetric," Rolfe said, pointing to a few percentage points of downside which would start Buffett buying back shares and upside to the insurance and operating subsidiaries growth.
Shields' hesitates, based on the belief that Berkshire, both with and definitely without Buffett, may be little more than a very expensive S&P 500 index fund -- an index fund with a very heavy insurance weighting. Its insurance portfolio ballast is within an industry typified by a slowing growth profile, too.
Meanwhile, the housing market investments that have held Berkshire back even as other consumer-oriented operating businesses have turned around, remains a portfolio leg with considerable uncertainty: Buffett himself said in his most recent annual letter that he was "dead wrong" about a housing rebound, but will be right eventually.
Eventually isn't good enough, though.