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Buffett's Next 5 Years and Berkshire Hathaway for the Ages

Omaha, Nebraska (TheStreet) -- Warren Buffett may be the top investor of his generation, but it is Berkshire Hathaway's (BRK.B) strong earnings outlook that may cement the "Oracle of Omaha" as a market wizard for the ages.

Some of this generation's most prominent investors close their funds to outside money, for instance hedge-funders Stanley Druckenmiller, Carl Icahn and George Soros, while others such as Bill Gross of bond giantPIMCO question whether the smartest minds on Wall Street simply benefited from an advantageous era to make investments. Also see: Berkshire Hathaway Operating Earnings Rise 42%

But even if Gross' point has merit, Buffett's legacy is likely to surpass his peers by way of Berkshire Hathaway's long-term prospects.

Gross, chief investment officer and co-founder of Pimco, the world's top bond manager, made headlines in April when he questioned whether famed investors, such as Buffett, Mario Gabelli of GAMCO Investors, George Soros of Soros Management, Leon Cooperman of Omega Advisors, Ray Dalio of Bridgewater Management, Howard Marks of Oaktree Capital, Peter Lynch of the Fidelity Magellan Fund and himself, really deserved credit for strong returns given their investment records occurred in a generation marked by falling volatility and easing interest rates. Also see: Berkshire Hathaway Operating Earnings Rise 42%

Ultimately, Gross wondered how the aforementioned investing titans would have fared in another age.

Would their returns have been so spectacular? Did they deserve monikers like the "Oracle of Omaha" and the "Bond King?" Also see: Doug Kass To Throw a Few 'Curveballs' At Warren Buffett

"My point is this: PIMCO's epoch, Berkshire Hathaway's epoch, Peter Lynch's epoch, all occurred or have occurred within an epoch of credit expansion -- a period where those that reached for carry, that sold volatility, that tilted towards yield and more credit risk, or that were sheltered either structurally or reputationally from withdrawals and delevering (Buffett) that clipped competitors at just the wrong time -- succeeded," Gross wrote.

"What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered? . . . Ah, now, that would be a test of greatness: the ability to adapt to a new epoch," Gross added. Also see: Doug Kass To Throw a Few 'Curveballs' At Warren Buffett

"The problem with the Buffetts, the Fusses, the Granthams, the Marks, the Dalios, the Gabellis, the Coopermans, and the Grosses of the world is that they'll likely never find out. Epochs can and likely will outlast them."

Gross manages 25 U.S. mutual funds with combined assets of $373 billion, according to Bloomberg and was ranked the bond manager of the decade by Morningstar.

While Gross, a so-called 'bond king,' is right to question his returns in an era of falling interest rates, and those of his hedge fund counterparts given their access to cheap leverage, he may miss the mark when it comes to Warren Buffett.


Buffett, by way of over 80 operating subsidiaries at Berkshire Hathaway including a sprawling insurance operation, recent acquisitions such as BNSF Railways and Lubrizol and fast-growing units like MidAmerican Energy, Iscar and Marmon Group, will see his investments tested in a new epoch.

Were Buffett to announce his exit from Berkshire tomorrow -- he won't -- the "Oracle's" wizardry will be bench-marked by way of Berkshire Hathaway's earnings and its performance relative to the S&P 500.

As a result of the momentum Buffett has imparted on Berkshire by way of acquisitions, careful allocation of capital among operating subsidiaries and an investment portfolio that's leveraged to U.S. and international growth by way of stakes in Coca-Cola (KO), Wells Fargo (WFC) and IBM (IBM), some investors are almost indifferent to succession plans for the long-time Berkshire head.

Shareholders are investing in Berkshire's ownership of operating businesses and the leverage that the company should get from the next five-to-10 years of economic improvement, according to William Smead, chief investment officer of Smead Capital, an investor in Berkshire's B-shares.

Smead expects Berkshire will sustain compound internal growth rates of about 15% annually for years to come.

Mario Gabelli of GAMCO Investors said earlier Friday on CNBC he expects Berkshire's internal book value growth to slow from historic rates of about 20% annually to 10% annually. Still, Gabelli expects a 10% book value growth rate to outperform high single digit gains posted by the S&P 500.

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