Buffet: Finding successor ‘won’t be easy’

AS HE looks for an investment manager to succeed him someday, Warren Buffett has set his standards high.

“I intend to hire a younger man or woman with the potential to manage a very large portfolio,” writes Buffett, the 76-year-old chairman of Berkshire Hathaway, in his annual letter to shareholders published earlier this month.

“Picking the right person will not be an easy task.”

The ideal candidate, he says, will be “someone genetically programmed to recognise and avoid serious risks, including those never before encountered.”

Other key requirements: “Independent thinking, emotional stability, and a keen understanding of both human and institutional behaviour.”

Buffett made no mention of the most daunting aspect of all.

Whoever winds up with the job will be stepping into the shoes of one of the most acclaimed investors ever. Buffett is the quintessential hard act to follow.

And yet, as with many discussions Buffett has included in his letters over the years, the comments are noteworthy for investors of all sizes, including those who will never manage big sums. Any ordinary mutual-fund owner can measure himself or herself against the ideal Buffett describes.

No matter how modest, every individual or family asset-building plan needs to be managed with an eye to a future full of risks both known and unknown. If you can think for yourself, stay calm and develop a feel for the markets’ way of behaving, so much the better.

As coincidence would have it, Buffett’s comments proved especially timely this year. Just two days before the letter was published, the US stock market took its sharpest drop in four years, dragging the Dow Jones Industrial Average down 416 points, or 3.3%.

“Don’t just sit there, do something” the market seemed to scream. And yet, in a very real sense it was too late to take any action worth taking.

Reacting after the fact to market surprises, Buffett’s comments make clear, is simply not good enough. To approach the problem right, investors need to look ahead, to anticipate. That doesn’t have to mean figuring out the future ahead of time, which is a well-nigh impossible task. What it does call for is taking the right protective measures before trouble strikes.

What chance do small investors have in this game? They are far from helpless. They can start with an asset-allocation plan mixing stocks, bonds and money-market securities that is designed for their own needs, not according to the way the markets have been behaving lately.

“If your time horizon is short, you should have little or no exposure to stocks,” said Stuart Ritter, a financial planner at T Rowe Price Group, in a February 28 note to the fund manager’s investors. “So yesterday’s declines would have had little effect on you. If you have a long time horizon, say 10 to 20 years, what happens over the course of one day should also have little effect on you.”

This is not an argument for burying your head in the sand when a day like February 27 comes along. The drop was, as bond-fund manager Bill Gross at Pacific Investment Management Co aptly described it, “a slap in the face. If you want to take some risk, you have to expect something like this once in a while.”

Such events are prime occasions to ask whether something important has changed. To come up with a good answer, apply a measure of Buffett’s recommended understanding of the way investors and markets behave.

Chet Currier is a Bloomberg News columnist. The opinions expressed are his own.