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Warren Buffett’s decision to step down as CEO of Berkshire Hathaway at the end of the year wasn’t well received by investors. In the five weeks following the announcement, Berkshire’s shares fell 9% while the broader market rose 6%. The anticipated evaporating of the “Buffett premium” appears to be underway.
Key Takeaways
- In the five weeks since Warren Buffett announced he is stepping down as Berkshire Hathaway’s CEO, the conglomerate’s shares have fallen 9%.
- For years, investors were willing to pay a premium for Berkshire shares because Buffett was
managing their money. - Analysts predict that premium could now evaporate.
What Is the Buffett Premium?
For many years, Berkshire Hathaway commanded a higher valuation than the true value of its assets and similar businesses simply because its CEO is Warren Buffett. Buffett is widely considered one of the best investors of his time, and investors are happy to pay extra to have him managing their money. This is known as the “Buffett premium.”
Why Is Berkshire’s Stock Falling?
It was perhaps inevitable that sentiment toward Berkshire would suffer when Buffett announced his retirement.
Buffett tried to prevent an exodus by reassuring investors that his predecessor is a better manager, that he won’t be selling his stock, and that he will stay on as chairman and still be in the office most days. This positive rhetoric, coupled with Greg Abel’s assurances that the investment philosophy won’t change, helped limit the damage but wasn’t enough to stop some investors from jumping ship.
Berkshire not having the same appeal without Buffett at the helm is just part of the story. Challenges are plentiful and operating profit growth is expected to be minimal in 2025 and 2026, making the shares, which kept rising, look extremely expensive, even by their own high standards. Before Buffett called it quits, investors were perhaps willing to turn a blind eye. Now, he’s set to be replaced by a relatively unknown figure, and these challenges are suddenly magnified.
Analysts flagged the biggest risks, including pressure to use the large amount of cash Berkshire has amassed better, particularly now that interest rates are falling, which won’t be easy for a company of this stature. On top of that, structural changes in the U.S. economy, climate change, and autonomous driving could have a negative impact on companies in Berkshire’s portfolio.
Is the Buffett Premium a Thing of the Past?
Numerous analysts believe Berkshire will no longer be able to command as high a valuation without Buffett in charge. The recent re-rating supports this theory, although it’s still too early to call.
Some investors left quickly, while others may wait until after Buffett leaves, or give the new boss a chance to prove himself before passing judgment. To wipe out the Buffett premium, a much bigger sell-off is required.
Losing someone as famous and widely respected as Buffett is bound to hurt Berkshire, at least from a perception standpoint. For decades, he’s been the reason why many people invest in Berkshire.
History, however, suggests investors could look past Buffett’s departure. When Steve Jobs died in 2011, many people figured Apple was done. Its share price since then proves they were wrong.
The Bottom Line
Berkshire Hathaway’s falling share price after Buffett’s departure announcement backed up the theory that the company will no longer be able to justify its premium valuation.
But other companies have gone on to flourish without their star boss. Whether Berkshire does, too, will likely depend on what it does with the cash it has. For now, most investors are still betting on Abel to continue Berkshire’s winning ways. However, one slip-up could be a reason for doubt that might unsettle investors and end the days of premium price tags.
