Warren Buffett’s Cancer Raises Questions About Berkshire Succession

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(Anthony Bolante / Reuters)

Berkshire Hathaway CEO Warren Buffett at the Allen & Co. Sun Valley Conference in Sun Valley, Idaho, on July 6, 2011

Warren Buffett revealed to Berkshire Hathaway shareholders in a letter yesterday that he has been diagnosed with stage 1 prostate cancer. Buffett assured shareholders that the condition was not “life threatening or even debilitating in any way,” and that additional tests “showed no incidence of cancer elsewhere in my body.”

Is there reason to believe that optimism is justified? As our colleagues at TIME Healthland noted today:

The prognosis for such early-stage prostate cancer is generally good, and because the cancer is typically so slow-growing, for older men it’s unlikely to be fatal — they will die with the disease not because of it.

Still, any evidence of poor health in an eighty-one year old man is cause for concern, especially if you’re a stakeholder who is dubious of the company’s succession plan or any other executive’s ability to fill Buffett’s formidable shoes. Indeed, initial reaction to the news was not good, with Berkshire shares dropping by nearly 2% in after-hours trading following the letter’s release.

(MORE: TIME’s Interview With Warren Buffett)

This despite the fact that Buffett was unusually candid about the company’s plans for replacing him in February’s annual shareholder letter — though he did not name names. Wrote Buffett in February,

“Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright. More than 98% of my net worth is in Berkshire stock, all of which will go to various philanthropies. Being so heavily concentrated in one stock defies conventional wisdom. But I’m fine with this arrangement, knowing both the quality and diversity of the businesses we own and the caliber of the people who manage them. With these assets, my successor will enjoy a running start. Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do.”

Despite these calming words, the conventional wisdom is that Buffett is, at least on some level, irreplaceable. Eric Rosenbaum echoed this view in The Street,

“The broader issue is that Berkshire’s vast empire covers sectors including financials, utilities, the housing market, and railroads, though he has well-regarded top lieutenants for most portfolio flagships and the managers of wholly owned Berkshire subsidiaries have always had wide latitude in running their businesses. However, Buffett’s outsize role in negotiating mergers and acquisitions for the company, and his reputation as the don of American capitalism, are viewed by most market watchers as harder, likely impossible to replace, through any one individual.”

This line of thinking may spell trouble for Berkshire stock in the short term, but if Buffett’s condition is as benign as his letter makes it appear, then the Oracle of Ohama surely has a few good years left in him. Ultimately, investors must have faith in Berkshire’s board and Buffett himself to have a sound succession plan in place, and that whomever Buffett chooses will be able enough not to muck up the “running start” Buffett has said he’ll be giving his next-in-line. As Jeff Matthews, author of the the book Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett told Reuters, “”I think it means zero for Berkshire investors. He’s been getting the company ready for the day he dies . . . It’s a shock, but it’ll wear off quickly. If the news was ‘he has pancreatic cancer,’ well, it would be a shock and then a lot of hand-wringing.”

(MORE: Warren Buffett on Succession, Stock Buybacks, and Why He Doesn’t Like Gold)