A Warren Buffett Question

From S.N. at Carleton College: “My question pertains to Warren Buffett’s Berkshire Hathaway shares. I was wondering what would happen if Buffett died tomorrow. Wouldn’t the shares tumble in value? And if so, considering that he will die someday, isn’t it a good stock to short for a long-term investor? Excuse me if the question is a tad morbid.”

You’re excused. And, yes, if Warren died tomorrow, the shares would doubtless tumble.

But just before you short a share, there are two things you should know:

1. It would be really dumb.

2. I mean, really dumb.

I could see shorting Berkshire for a quick dip if you think it’s gotten ahead of itself. It’s $30,850 a share as I write this, but that’s already down from its $38,000 high earlier in the year. (In hindsight, that would have been a better time to short it.)

I could also see shorting it if you think a long-term capital gains cut will pass and the market hasn’t discounted the selling pressure that would result, as people who bought shares 20 years ago run to take their immense profits largely tax-free.

I’m not saying I’d do these things (or that a capital gains tax cut is imminent), but they at least are plausible things one might do.

Shorting Berkshire “for the long-term,” on the other hand, rivals going on an arsenic-and-lead-paint health regimen.

Buffett turned 66 August 30th. According to the life expectancy module of Managing Your Money that I once helped put together, his odds of dying this year are less than 12 in 1,000. Given the fact that he doesn’t smoke, has no money troubles to worry about, and so on, he can be expected to live about 24 more years, to age 90. Of course, this doesn’t take into account the rather extraordinary medical care he’d be likely to be get if anything ever went wrong.

One of the entrepreneurs whose company he bought, “Mrs. B” of the Nebraska Furniture Mart, was tooling around the mammoth store in her golf cart issuing orders well past her 100th birthday, and I think you can expect Warren to be doing much the same.

If something did happen to him tomorrow, Charlie Munger, Buffett’s brilliant but older partner, would doubtless be able to keep the business growing nicely and find a way to leave it in good hands, which should cushion the blow to the stock. If he died tomorrow, the stock would tumble — but certainly not collapse. I’d guess you’d see a 20% drop.

But let’s say he hits 90 on the dot, then retires. And let’s say that instead of growing Berkshire’s book value at a compounded 23% or so, as he has for so long, he can grow it only 18%. (It gets harder as you get bigger, and maybe Buffett’s bulb will dim a bit with age.) Under these assumptions, the long-term investor who shorts one share today at $30,850 and hangs in there for 24 years would see the stock at nearly $2 million a share.

Of course, if I really expected the stock to be $2 million a share in 24 years, I’d be buying it, and I’m not. It’s always seemed a little, or a lot, ahead of itself, even when I first wrote about it at $300 a share. But shorting Berkshire Hathaway until Warren Buffett dies? Why not just shoot yourself in the head and get it over with?