Berkshire’s Greg Abel admits ‘Warren is obviously a very hard act to follow’ in first letter to shareholders

Greg Abel paid tribute to his predecessor Warren Buffett while promising in his first shareholder letter that Berkshire Hathaway won’t retreat from investing or make significant changes in the way it operates.

Abel said he will always maintain Berkshire’s financial strength but investors shouldn’t look at the company’s $373.3 billion cash as a sign that it’s not interested in new investments. The number is actually down slightly from the third quarter’s $382 billion. Abel said that cash acts as “dry powder” to ensure Berkshire is ready to act at a moment’s notice.

“Our balance sheet is a strategic asset to be deployed at the right time. It allows us to act decisively, invest when others are tentative or fearful, and stand firm when financial storms roll through,” Abel wrote.

But Abel did say Berkshire will avoid buying any businesses “that undermine the fabric of society or could jeopardize Berkshire’s reputation” without explaining which companies that standard might exclude. CFRA Research analyst Cathy Seifert said she wonders whether Abel would consider AI companies as undermining society.

An extremely tough act to follow

Abel acknowledged up front that “Warren is obviously a very hard act to follow,” and he didn’t try to match Buffett’s wit. Yet investor Adam Mead said he thinks Abel struck the right tone in his letter that seemed crafted to provide the details Berkshire’s largest shareholder would want to know.

“I have no doubt in my mind that he had Warren in his mind the entire time he was writing this letter,” said Mead, who wrote “The Complete Financial History of Berkshire Hathaway.”

Abel did discuss some of Berkshire’s biggest investments in Apple and American Express stock as well as detailing how it had more than doubled its money on paper with its investments in five Japanese trading houses. But Berkshire did take a $4.5 billion write-down on the value of its Kraft Heinz and Occidental Petroleum stakes. He also said that Berkshire’s other investment manager, Ted Weschler, handles only about 6% of the portfolio. The rest will be Abel’s responsibility, which raises some questions because he’s never made a living as a stock picker.

The bottom line numbers

A paper gain on Berkshire’s investments kept the company’s bottom-line net income of $19.199 billion in the fourth quarter close to the previous year’s $19.69 billion even with the write-downs.

But Buffett and Berkshire have long said that operating earnings are a better measure of performance because they exclude investment gains and losses, which can skew the numbers significantly even when Berkshire isn’t selling most of its stocks. By that measure, Berkshire’s operating earnings fell nearly 30% to $10.2 billion, or $7,092.09 per Class A share. The four analysts surveyed by FactSet Research predicted operating earnings of $8,259.23 per A share.

Abel praised several of Berkshire’s companies like Geico and Precision Castparts, but said that BNSF needs to improve significantly because its profits lag behind other railroads and its utilities need to deal with the risks associated with wildfire liabilities. He said PacifiCorp will pay damages when it is responsible, but it will continue to fight lawsuits in fires that its equipment didn’t start.

Berkshire again did not repurchase any of its shares in the fourth quarter. Abel told shareholders not to expect him to start giving quarterly commentary because Berkshire takes a long-term approach. Seifert said she appreciated his factual approach to the letter.

“He’s coming into this role from a much different perspective. He wasn’t the person who built it up. He’s got to run this thing,” Seifert said.

Big changes aren’t likely

Investors are watching closely for any changes he might make, but Abel and Buffett have said there won’t be significant changes in the way Berkshire operates. because it has worked so well over the past six decades.

And Buffett remains chairman and the largest shareholder, so he’s still helping guide the Omaha, Nebraska-based conglomerate he built. But Abel is now writing the annual letters that were always known as one of the most-read business reports out there because so many investors admired and followed Buffett because of his remarkable track record and homespun wit and advice.

Abel announced a few changes to the lineup for the shareholder meeting in May. The first question-and-answer period will feature Abel alongside Berkshire’s Vice Chairman for insurance, Ajit Jain. Then a second panel will have Abel answering questions with BNSF CEO Katie Farmer and NetJets CEO Adam Johnson, who now helps oversee all of Berkshire’s consumer, service and retail businesses.

The only initial changes so far are some administrative moves Abel made as he took over, and a filing in January suggesting Berkshire is considering sell off some or all of its 325 million Kraft Heinz shares. But Buffett may have supported that move because he had made comments about how Berkshire overpaid when it helped Heinz merge with Kraft, and he had been critical of packaged food giant’s plan to split into two companies. Many investors have tried to copy the moves Buffett made in Berkshire’s massive portfolio of stocks.

But Berkshire is powered by the dozens of companies it owns In addition to insurance, utility and manufacturing firms, Berkshire owns well-known brands like Dairy Queen and See’s Candy along with some of the companies that supply what other industries need like Precision Castparts, Lubrizol and Iscar Metalworking.

Abel already knows many of Berkshire’s companies well because he has been managing all of the non-insurance companies since 2018, and the executives who report to him have praised his insights into their different businesses.

This story was originally featured on Fortune.com