Hot Stocks: Are the Best Years Behind Warren Buffett and Berkshire Hathaway?

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The mood this weekend at Berkshire Hathaway Inc.'s (NYSE: BRK.A, BRK.B) annual shareholder meeting could be less festive than usual, darkened by a laundry list of concerns that includes mediocre returns and who eventually will succeed iconic Chief Executive Officer Warren Buffett.

Analysts also expect shareholders to question an ethical lapse this year that resulted in the resignation of top executive David Sokol on March 29.

In January Sokol made a $10 million investment in Lubrizol Corporation (NYSE: LZ) — shortly before recommending to Buffett that Berkshire acquire the company. When Berkshire announced on March 14 that it would indeed acquire Lubrizol for $9 billion, Sokol pocketed a $3 million profit.

The Sokol episode follows a two-year period in which Berkshire shares have merely tracked gains in the Standard & Poor's 500 Index, rather than substantially outperform the market as it has in the past.

"I want to hear more about Sokol, I want to hear more about how they're going to outperform the markets. I want to hear about what (Buffett's recent) trip to India leads us to believe about how the money is going to be invested in the future," Michael Yoshikami, chief executive of wealth management firm YCMNET Advisors told Reuters.

'Bountiful years' over

Although Berkshire has continued to make money, its stock performance lately has been lackluster. It's only a little ahead of the S&P 500 since September 2008 and has actually underperformed the benchmark index by 4% since the beginning of the year.

Berkshire investors are accustomed to more robust returns. The stock on average has beaten the S&P 500 by more than 10%, but in his February annual letter Buffett himself warned that the days of outsized gains are over.

"The bountiful years, we want to emphasize, will never return," Buffett wrote. "The huge sums of capital we currently manage eliminate any chance of exceptional performance. We will strive, however, for better-than-average results and feel it fair for you to hold us to that standard."

Implications of the Sokol incident, the latest in a series of atypical lapses in judgment, will also be high on the agenda of many of the 40,000 Berkshire shareholders converging on Omaha, NE tomorrow (Saturday).

Investors for decades viewed Buffett as a straight shooter, the one magnate who refused to play Wall Street's games. But recently those lofty opinions have begun to shift.

Cracks in Berkshire's once-ironclad reputation started about four years ago, when the company drew criticism for buying stakes in PetroChina Company Limited (NYSE ADR: PTR), which had connections to a Sudanese government accused of human rights violations, and Pacificorp (AMEX: PPW-), which was accused of environmental transgressions.

But the most serious damage was done during the financial crisis. Buffett, an adviser to U.S. President Barack Obama, strongly supported the Troubled Asset Relief Program (TARP).

Berkshire owns large stakes in many of the companies that received the aid, including Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corporation (NYSE: BAC) and Wells Fargo & Company (NYSE: WFC), making it a significant beneficiary of the TARP help that Buffett advocated.

Sokol Backlash

The Sokol affair has revived concerns that Berkshire may not be the paragon of virtue many thought it to be.

Some analysts blame the incident on the company's lax internal controls. Buffett has always boasted of his trust-the-subordinates, laissez-faire style of management, but it does leave Berkshire vulnerable to rogue behavior.

"It's the kind of behavior that, as a matter of corporate governance, sophisticated companies try to avoid," John Coffee, a law professor at Columbia University told Reuters.

Yet observers found Buffett's weak response – a news release announcing Sokol's resignation defended the legality of his lieutenant's actions without addressing the ethical issues – even more troubling.

"You don't need to be a high-powered lawyer to shudder at Warren Buffett'shollow attempt to defend David Sokol's Lubizol stock trading," Wall Street Journal columnist David Barusch wrote. "For any CEO who is knee deep in the incident to hastily proclaim that the conduct wasnot "in any way unlawful"lacks credibility."

More negative fallout from the episode followed quickly. The ratings arm of S&P issued a statement the week after Sokol's resignation also raising concerns about Berkshire's corporate governance.

On April 18, Berkshire investor Mason Kirby filed a lawsuit against Sokol and the Berkshire board of directors claiming breach of fiduciary duty.

And then there's the fresh consternation over who will take the CEO reins from Buffett. No one, not even Berkshire's top executives, know who is next in line, although Sokol topped most lists.

With Buffett now 80, and partner and vice president Charles Munger at 89, the need for a succession plan is obvious. Buffett has said for years the job will be split among several executives, but no one is sure who will land where.

While most of the possible candidates are more than competent, analysts worry that the sheer force of his personality makes Buffet irreplaceable. He has run Berkshire since 1965.

"What you lose when you lose Buffett is the global reputation and the charm," James Armstrong, a portfolio manager at Henry H. Armstrong Associates in Pittsburgh told Reuters. "The successor won't have the skill to attract acquisitions from all over the world and drive the same hard bargains Buffett can."

With so much anxiety swirling around Berkshire, shareholders and analysts could be forgiven for wondering if the company's best years are behind it.

"The passage of time is hitting home. This year is the end of Berkshire as it used to be," Alice Schroeder, a former stock analyst and Buffett biographer told Reuters. "Even if people think Buffett's not going to address all these issues and the questions won't be as tough as they should be, Berkshire as it used to be is over."

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