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 giant PIMCO 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.

For his part, Warren Buffett is concerned about Berkshire Hathaway's potential underperformance under his watch.

At the beginning of Berkshire's 2012 annual shareholder letter, Buffett lamented an underperformance of Berkshire's book value growth relative the S&P 500. He fears the firm's five-year book value growth rate may underperform the S&P 500 for the first time ever.

"To date, we've never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five year wins will end," Buffett wrote.

In 2012, Berkshire's book value per share increased 14.4%, behind the S&P 500's gains of more than 15%.

Were Berkshire to perform below Buffett's goal posts in 2013, he indicated considering a dividend for the conglomerate, however, shareholders generally dismiss the prospect of such a move.

Buffett's legacy is a hot topic heading into Berkshire Hathaway's annual shareholder meeting on May 4, given uncertainty surrounding a successor to run the conglomerate with a market capitalization approaching $270 billion.

"I think the succession question will be obviously front and center," said Thomas Russo, a partner at Gardner, Russo & Gardner in an April interview. "I gather there will be some commentary."

In late 2011, Buffett also said his son, Howard Buffett, will succeed him as a non-executive chairman of Berkshire to oversee a maintenance of the firm's values.

Less clear is who would be chief executive of Berkshire Hathaway. Currently, speculation centers on insurance unit head Ajit Jain, BNSF railroad CEO Matthew Rose, MidAmerican Energy CEO Greg Abel as leading candidates to be Buffett's successor.

Buffett has informed Berkshire Hathaway's board of directors of his successor.

Russo, the Berkshire investor, sees room for multiple job openings to replace Buffett, when the time comes. He expects up to four roles to fit the shoes of Buffett.

Gardner, Russo & Gardner is Berkshire's tenth largest shareholder with a stake of nearly $800 million in the company's Class A shares and over $200 million of Class B shares, according to Bloomberg data. Russo says Berkshire holding's represent about 11% of the firm's assets.

While succession and Berkshire Hathaway's performance as the conglomerate grows in size both stand out as uncertainties heading into the company's annual meeting, they also may eventually prove Buffett's greatness.

Buffett likely has many years left at the helm of Berkshire to cut acquisitions and fire his elephant M&A guns before he passes the reins to a successor. Unlike his hedge fund and mutual fund contemporaries, however, Buffett's track record will be tested long after he's left Berkshire.

-- Written by Antoine Gara in Omaha, Nebraska.

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