On February 28th Warren Buffett released his 50th annual letter to shareholders. In April of last year, we considered how his succession might play out.

WHAT do the next 50 years have in store for Berkshire Hathaway, the conglomerate Warren Buffett has run with spectacular success for the past half century? It is an interesting question, Mr Buffett acknowledged in a recent note to The Economist declining to be interviewed about it; “so interesting that I recently assigned the same story to myself” and “I don’t want to step on my own lines.” But, he offers, “in 50 years, we can have lunch and compare the actual to the projected.”

Mr Buffett has joked that “I love running Berkshire, and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.” In that spirit this newspaper looks forward to taking him up on the offer of lunch on or around his 134th birthday. But having built Berkshire Hathaway on his mastery of the insurance business, he will know that the actuarial tables seldom lie, and that the biggest challenge his beloved company will face in the next 50 years is the transition to new management. He has already acknowledged that his shoes will be hard to fill, with plans for his job to be split into three: chairman, chief executive and chief investment officer.

Succession is by no means the only big issue facing the company. With a market capitalisation of $314 billion, Berkshire Hathaway is now America’s fifth-most-valuable public company, behind Apple, Exxon Mobil, Google and Microsoft. But the bigger it gets, the harder it becomes to find enough of the sort of attractive investment opportunities that earned Mr Buffett his reputation—and a fortune estimated by Forbes at $65 billion, the third-biggest in the world, even after philanthropic donations of many billions of dollars. And in becoming an increasingly diverse and complex conglomerate it is starting to test the limits of his famously light-touch management style.

Record profits of $19.5 billion in 2013, and a share price that touched a new all-time high on April 23rd, should ensure the usual high spirits at the annual Berkshire Hathaway shareholder meeting, held over the first weekend of May in Omaha, Nebraska. As it has for years, this “Woodstock for capitalists” will attract tens of thousands of shareholders; the festivities will include a corporate film (normally packed with celebrities), an “invest in yourself” 5km run and a newspaper-throwing contest in which Mr Buffett, who made some of his earliest money from a paper round, takes on all comers. But questions about the company’s slower growth of late and the post-Buffett succession are sure to crop up during the more than six hours of quizzing by shareholders, financial analysts and journalists to which Mr Buffett and Charlie Munger, his 90-year-old long-term business partner, willingly subject themselves. The legendary “Oracle of Omaha” is sure to say that the best is yet to come—and so it has always proved, so far. But all winning streaks come to an end.

Mr Buffett’s Berkshire Hathaway streak began in 1964, when he was running a small investment fund in Omaha. He wanted to sell his stake in the company, a New England textilemaker, to its owner. But after the owner tried to shave an eighth of a dollar off the agreed price Mr Buffett decided instead to buy the whole thing. He has since called the investment his “dumbest stock”; the textile business proved worthless and was eventually, rather painfully, closed.

From dumb beginnings

By then, though, Berkshire Hathaway had come into its own as a vehicle whereby Mr Buffett could buy other companies, or stakes in them, initially in the insurance industry. Today Berkshire Hathaway owns over 80 companies. Eight and a half of them would be in the Fortune 500 if they were stand-alone businesses: “Only 491½ to go,” Mr Buffett says in the latest of his annual letters to investors. (The half is Heinz, a food company bought in 2013 jointly with 3G Capital, a Brazilian private-equity firm.) The big fish include GEICO, which recently became America’s second-biggest car insurer, Mid-American Energy, a power utility, and Burlington Northern Santa Fe, a railway (see table). There are lots of smaller fry, including consumer companies like Dairy Queen, an ice-cream chain, and Borsheims, a jeweller, and NetJets, a timeshare company for corporate planes. Berkshire Hathaway also has large minority shareholdings in several blue-chip American firms, including American Express, Coca-Cola, IBM and Wells Fargo.

Mr Buffett’s career has made him a living rebuke to the “efficient-markets hypothesis” once beloved of financial economists, which says that the current market price always reflects all available and relevant information about a firm. Mr Buffett has consistently beaten the market by buying good-quality firms that he is confident he understands, typically outfits operating in a relatively stable industry. His preferred acquisitions have a hard-to-replicate advantage over their competitors—a popular brand, say, or a degree of monopoly power—that he likes to describe as a protective “moat”. He also favours firms with a strong ethical culture, and management that is interested in doing a good job, not just making money. If he gets the shares when they are cheap (just after Coca-Cola’s “new Coke” debacle, for example), all the better: but “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he says.

He sticks to these principles even when the mood of the market is against him, as it was during the dotcom bubble. From the end of June 1998 to the end of February 2000, Berkshire Hathaway’s share price fell by 44% while the overall stockmarket rose by 32%. Mr Buffett was widely derided for failing to “get the new economy”. But declining to invest in companies he did not understand paid off pretty well when the bubble burst.

Academic studies of Berkshire Hathaway confirm that Mr Buffett does what he says he does. Berkshire Hathaway has beaten the market over the long run by investing in relatively low-risk stocks the market was underpricing, according to “Buffett’s Alpha”, a study by three economists, Andrea Frazzini, David Kabiller and Lasse Pedersen. The study found that when it comes to outperforming the market on a sustained basis (see chart), Berkshire Hathaway is arguably without equal. The company’s Sharpe ratio, a measure of return per unit of risk, is higher than that of any other share that has traded for a period of at least 30 years since 1926.

Recently, though, it has not been outperforming. From 2009 to 2013, Berkshire Hathaway’s market value grew at a slower rate than the S&P 500 index, the first five-year period in which this has been the case since Mr Buffett took over. That can largely be attributed to the financial crash of 2008: the market as a whole fell by far more than Berkshire Hathaway, so had more potential to bounce back. But the firm’s long-term growth rate has been slowing, too, notes Jonathan Brandt, an analyst at Ruane, Cunniff & Goldfarb, an investment firm. Book value per share, a rough guide to the firm’s intrinsic value, increased by nearly 25% a year over Mr Buffett’s first 34 years. It has grown at only 9% since. “Over the next ten years, my most optimistic scenario has intrinsic value growing by 12% a year,” says Mr Brandt.

Hunting elephants

The bigger Berkshire gets, the bigger the deals it needs to make to keep growing. Heinz was worth $23 billion when Mr Buffett and 3G acquired it; Kellogg’s, a breakfast-cereal maker said to be in his sights, has a market value of $24 billion. Getting an attractive price on such high-profile deals is harder now that the bigger private-equity firms and activist hedge funds are recapitalised and rediscovering their appetite. And there are fewer big firms to choose from; that makes finding something that fulfils all Mr Buffett’s criteria harder, and compromises more likely. A big stake in IBM taken after years of avoiding technology companies on the basis of incomprehension looked like such a compromise.

In recent purchases, such as Heinz and the acquisition of a utility in Nevada by MidAmerican, Mr Buffett has been making more use of debt. Leverage has long been part of his recipe, but in moderation. According to the “Buffett’s Alpha” study, Berkshire Hathaway borrows about 60 cents for every dollar of equity, and it has always ensured it has enough liquidity—including a cash pile—to avoid having to offload assets cheaply in a fire sale. As Mr Buffett often points out, the “float” provided by the insurance business, in which premiums are paid well before claims are honoured, is a great advantage in this respect. In 2013 that float topped $77 billion.

Berkshire Hathaway’s abundant liquidity allowed it to act as a sort of financier of last resort during the financial crisis. Cash-strapped firms including Goldman Sachs and GE paid handsomely for Mr Buffett’s assistance—as well as the personal seal of approval his offer to help carried with it, which may have been more valuable right then than the money. But greater use of borrowing could be seen as a worrying sign in the run-up to Mr Buffett’s departure: will the new management be as disciplined as his gold-seal reputation shows Mr Buffett to have been?

Mr Buffett’s management success is almost as impressive as his investing. Berkshire Hathaway, which trades 40% over its book value, is now the leading exception to the rule that conglomerates destroy the value of the firms they own rather than add to it. “No other firm in the past 100 years has been able to do consistently what Berkshire Hathaway has done,” says Andrew Campbell, co-author of “Strategy for the Corporate Level”, a book about managing big companies.

Part of the reason for this success is that Mr Buffett avoids making capital allocation a tool of internal politics—often a problem for conglomerates. And his investment strategy naturally provides him with companies he understands and management teams he trusts; Mr Buffett and Mr Munger feel they can mostly leave them alone. The trust runs both ways, with firms happy to have Mr Buffett send some of their profits elsewhere in the belief that he will let them retain what they need for growth in a way that short-term investors in the stockmarket might not. Mr Buffett runs his empire, which employs 330,000 people, with a headquarters staff that has slowly grown over the years to 24.

As Berkshire Hathaway’s companies get bigger, though, the internal demands for capital get larger and harder to evaluate. How much, for example, should Burlington Northern Santa Fe invest in upgrading its track and rolling stock to get natural gas out of North Dakota while keeping its traditional customers happy (something it is not currently doing well)?

Two other changes could challenge the “seamless web of deserved trust” to which Mr Munger ascribes the company’s success. As managers who were in charge of Berkshire Hathaway’s acquisitions when bought come to retire, their replacements may not all be as in love with their work, or as wealthy. Private-equity firms can incentivise managers by giving them equity and requiring them to get their firm ready for sale as fast as possible. Berkshire Hathaway, which buys companies for the long run, denies itself that motivational option.

And the demand for a more activist head office is likely to grow as Mr Buffett buys firms that need fixing or which he does not understand as well as he might. Doug Kass, an investor who is shorting Berkshire Hathaway’s shares, argues that as the company comes to pay fuller prices for larger companies it will have to work harder to squeeze out value. At Heinz there have been huge job cuts, something Mr Buffett has tried to avoid since shutting down Berkshire Hathaway’s textiles operations; tellingly, it was 3G that wielded the axe. Making a habit of restructuring could reduce the appeal Berkshire Hathaway has for families which want to sell a beloved firm to someone they think will care for it as they have.

What is more, though Berkshire Hathaway has only dipped a toe into foreign waters—Iscar, an Israeli machine-tool maker, and BYD, a Chinese carmaker, are its most significant overseas investments—many of the best prospects for future growth will be abroad. Requiring Mr Buffett’s understanding in markets he has little experience of could be something of a bottleneck, ruling out otherwise viable companies; that means more expertise is needed. Bringing 3G into deals, something Mr Buffett has said he would like to do again, could help—but is not without risk.

Mr Kass also points out that some of the moats Mr Buffett put his faith in are starting to get filled in. Coca-Cola can no longer rely on the market for branded sugar-water growing indefinitely; financial-services firms such as Wells Fargo may find their products increasingly commoditised.

Benjamin Moore, a paintmaker founded in 1883, has seen its network of independent dealers, supposedly a hard-to-replicate advantage, crumble. It is now on its third chief executive in two years, and there is growing discontent among its employees about its senior management, including its chairwoman, Tracy Britt Cool, a protégée of Mr Buffett’s. Berkshire Hathaway shareholders must hope that Benjamin Moore’s problems are a one-off, rather than the shape of things to come as Mr Buffett steps back.

Mr Buffett often refers to Ms Cool, whom he hired four years ago as a 25-year-old business-school graduate and has since put in charge of several businesses, as one of his “three Ts”—Tracy, Todd (Combs) and Ted (Weschler). They represent a new generation which is expected to come into its own after Mr Buffett passes on the baton. Mr Weschler, a 52-year-old hired after spending $5.3m in charity auctions for two meals with Mr Buffett, and Mr Combs, aged 43, have been given investment portfolios to manage in what is widely seen as a contest for the role of chief investment officer. Both men posted higher returns than Mr Buffett in 2013, though they had far less money to invest, which makes superior performance somewhat easier.

Si monumentum requiris

Mr Buffett says the board has considered at least three candidates to be the next chief executive, all men, and that he has told the board members his first choice. A couple of widely touted successors have left the firm since their names started doing the rounds. Ajit Jain, Mr Buffett’s trusted reinsurance guru, would be a popular choice among shareholders, who think he would bring the same disciplined approach to capital allocation that Mr Buffett does. But he is believed by analysts to have made it clear that he does not want the job.

The most obvious flaw in the succession plan, apart from the firm’s inability to clone Mr Buffett, is the one name that has been announced. The chairman will be his eldest son, Howard, a board-member of more than 20 years’ standing, a farmer, photographer and, thanks to the $1 billion foundation given to him by his father, philanthropist. Even accepting that his duties will be centred on preserving the culture and ethics of the firm, not on decisions that benefit from business experience, it seems a curious appointment for a fierce critic of the hereditary principle such as Mr Buffett senior to have made.

The board Mr Buffett junior is likely to inherit will be largely made up of friends of his father and of Mr Munger. At present, it works better than one might expect, but as Mr Munger says, “[Warren] knows what they’re going to say, and everybody knows that what he says is going to govern.” Under new leadership, the dynamics of a board made up of owners could easily turn nasty if times get tough. The most influential director is likely to be Bill Gates, the philanthropist and co-founder of Microsoft; he has strong opinions and does not suffer fools gladly.

At the very least, the new chief executive will have to win the trust of the post-Buffett board, and it may be a long time before he can be confident that what he says will go. It would be surprising if this did not result in a slower, more bureaucratic decision-making process than that of Mr Buffett, who says he has thought through and approved a multi-billion-dollar investment while taking a bath.

In 1969, as he started to focus fully on Berkshire Hathaway, Mr Buffett wound up Buffett Partnership, an investment firm he had run since the 1950s. He split the money among the investors, telling them that he could not find attractive investment opportunities in the conditions of the time. Maybe it would be wiser to consider something similar with Berkshire Hathaway, breaking it up as the time approaches for him to go, rather than leaving his successors an impossibly hard act to follow. This is what James Hanson did with Hanson Trust, a once formidable Anglo-American conglomerate, and Henry Singleton did with Teledyne, a conglomerate he had built up in the 1960s and 1970s. Mr Buffett once described Singleton as having “the best operating and capital-deployment record in American business”.

But he shows no interest in following Singleton’s lead when it comes to breaking up what he has built. It seems Mr Buffett wants to prove that his methods are not just for him, but can be institutionalised and passed on to a new generation of managers under whom Berkshire Hathaway will continue to thrive. To do that, he must risk leaving his legacy in the hands of others—who will face ever greater temptations to solve the problem of expanding a massive firm by breaking it up and keeping only the faster-growing bits.

Mr Buffett says that his thoughts about Berkshire Hathaway’s future after his tenure will be the focus of his 2015 letter to shareholders. It should be a good read. And if it ducks the question, there’s always lunch with him—or perhaps a successor—in 2064.