The conglomerate
question.

Saturday is Greg Abel's first Berkshire annual meeting as CEO. Berkshire is down fourteen percent since Buffett announced his retirement. The S&P is up twenty-six percent. The market has a question. Three papers are worth knowing about before you try to answer it.

→  Good morning

On Saturday morning, in a basketball arena in Omaha, Greg Abel will take the stage at the Berkshire Hathaway annual meeting. Warren Buffett will sit in the audience.

It will be the first meeting in sixty years where Buffett is not the principal speaker. Abel became chief executive officer on January 1. Buffett remains chairman. The Q&A, traditionally six hours of capital allocation philosophy delivered in front of forty thousand shareholders, will be led by Abel and Ajit Jain, the head of insurance, with operating CEOs joining for the second panel.

Since Buffett announced his retirement last May, Berkshire stock is down about fourteen percent. The S&P 500 is up about twenty-six percent. The forty-point gap is the market saying something specific. It is saying that a meaningful share of Berkshire's premium to peers came from Buffett personally, and that the conglomerate underneath, without him, may not deserve the same valuation.

That is a version of an old academic argument, with new data. The diversification discount is one of the most-studied facts in corporate finance. The conventional wisdom for thirty years was that diversified firms destroy value. Three papers from the last twenty-five years substantially complicated that picture. Most allocators have not noticed.

The first crack.

I decided to look back at my graduate finance notes from my MBA days.

About fifteen years ago, students were taught the diversification discount as settled empirical fact. Diversified firms trade at roughly thirteen to fifteen percent below the value implied by the sum of their parts. Berger and Ofek published the canonical paper in the Journal of Financial Economics in 1995. Owen Lamont followed in 1997 in the Journal of Finance, showing that internal capital markets at oil conglomerates allocated capital inefficiently after price shocks. We were taught that conglomerates destroy value, spinoffs unlock it, and focus is good.

Berkshire was always the exception. Buffett was treated as an idiosyncratic genius rather than as a counterexample to the research.

Then the literature began to push back. Rajan, Servaes, and Zingales published The Cost of Diversity in the Journal of Finance in 2000. Their question was specific. If conglomerates destroy value, where exactly does the destruction happen? The answer turned out to be conditional. The discount was largest at firms whose business segments had the most divergent investment opportunities. Internal capital markets at those firms tended to over-invest in segments with weak prospects and under-invest in segments with strong ones, because internal politics overrode pure return maximization.

That distinction matters. The discount was not a feature of conglomerate structure as such. It was a feature of how internal capital was allocated when segments had widely different return profiles. A conglomerate whose internal allocation discipline matched its actual return opportunities would not earn the discount, by the logic of the paper.

The measurement problem.

Catarina Custódio published Mergers and Acquisitions Accounting and the Diversification Discount in the Journal of Finance in 2014. Her finding cut deeper.

When a company makes an acquisition, the accounting writes up the target's assets to fair market value at closing. That write-up systematically inflates the book value of the diversified firm relative to its standalone-firm comparables. The diversified firm looks artificially expensive on certain book-based multiples and artificially cheap on the comparable-firm benchmarks the discount studies relied on.

Custódio showed that controlling for this accounting effect, the discount shrinks meaningfully for the M&A-active subset of conglomerates, which is most of them. The original finding from 1995 was real, but a substantial portion of the magnitude was a measurement artifact rather than economic value destruction.

Why steady compounders trade cheap.

Todd Mitton and Keith Vorkink published the third paper in the Journal of Financial and Quantitative Analysis in 2010. Their question reframed the discount entirely. If the discount exists, why? And what does it predict for future returns?

Their answer drew on a different strand of asset pricing. Investors prefer assets with positive skewness. Lottery tickets. Concentrated single-business firms with the chance of explosive upside. Diversified firms, almost by definition, smooth out their return distributions. Five segments offsetting one another rarely produce a ten-bagger. The chance of an extreme positive outcome is structurally lower in a five-segment conglomerate than in a single-product growth company.

Investors who care about skewness, disproportionately retail, momentum-chasing, and short-horizon, bid up single-business firms and discount diversified ones. The discount is real. It is also compensation for less lottery-style upside. Mitton and Vorkink showed that diversified firms therefore earn higher expected returns going forward, on average, precisely because they offer lower realized skewness. The discount becomes the source of the return, for an investor who does not need lottery upside.

Most readers of this newsletter are exactly that kind of investor.

Sixty years, 1965 – 2024

19.9%  /  10.4%

Berkshire compound annual market value vs. S&P 500 with dividends. Buffett's 2024 letter.

What Abel has to demonstrate.

Read together, the three papers complicate the simple version of the discount story. The discount is conditional on internal capital allocation discipline. Some of the apparent magnitude is a measurement artifact. And whatever discount remains is structurally compensation for lower lottery-style upside, which on average means higher expected returns going forward. Berkshire's sixty-year track record fits this revised picture. Internal allocation has been disciplined. The return profile has been steady rather than lottery-like. Each of those features traces to specific institutional choices.

The market's question for Saturday is whether those choices survive Abel's tenure. The fourteen-percent decline in Berkshire shares since the retirement announcement is the market's preliminary vote that the alpha left with Buffett. The academic literature suggests that vote is premature. Some of the discipline that produced sixty years of nineteen-and-a-half-percent compounding was Buffett personally, and that part is gone. Much of it was institutional. Internal capital allocation rules. Decentralized operations. Insurance float as a low-cost funding source. Concentrated decision-making at headquarters with operational autonomy at the subsidiaries. The institutional features can survive a CEO change. Whether they do is what Saturday tests.

What Abel needs to demonstrate Saturday is continuity in the institutional rules that produced the academic profile in the first place. Three things specifically.

The cash deployment plan. Berkshire ended Q3 2025 with about $381 billion in cash and Treasuries. That is the largest cash position in corporate history. Buffett's framework for deploying it has been discipline plus patience. Abel needs to show shareholders that the rules are unchanged, even if the deployer is.

The buyback signal. Berkshire resumed share repurchases in March, the first time since 2024. UBS estimates the stock is trading at roughly an eight-percent discount to intrinsic value. Henry Singleton at Teledyne, the canonical Outsider profile, would have been a heavy buyer at that level. Abel's pace from here will tell shareholders whether he reads valuation the same way Buffett did.

The technology question. Berkshire's historical underweight in technology was a deliberate choice rooted in Buffett's stated discomfort with predicting return on capital in fast-changing industries. The market wants to know whether Abel will run the same circle of competence or expand it. The right answer, by the academic framework, is whatever preserves the discipline of investing only where return on incremental invested capital is calculable with confidence. Whether that includes more technology than it used to is a question of judgment, not philosophy.

→  The takeaway

The financial press will spend the week framing Saturday as the post-Buffett era. That framing is true, and it is also incomplete.

The deeper question is whether the academic profile of Berkshire as a structurally well-built conglomerate, rather than as Buffett's personal vehicle, holds up under a new operator. Three papers from the last twenty-five years already specified what to look for. Saturday gives us live data.

Have a good Monday.

— Marques

About the author

Marques Blank is the founder of Blank Capital Partners and Blank Capital, a fractional CFO and FP&A advisory. Former Northrop Grumman ($1.6B business unit) and Citibank (securitized credit). CMA, MBA, Series 65.

Sources

Berger, P.G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of Financial Economics, 37(1).  ·  Lamont, O. (1997). Cash flow and investment: Evidence from internal capital markets. Journal of Finance, 52(1).  ·  Rajan, R.G., Servaes, H., & Zingales, L. (2000). The cost of diversity: The diversification discount and inefficient investment. Journal of Finance, 55(1).  ·  Mitton, T., & Vorkink, K. (2010). Why do firms with diversification discounts have higher expected returns? Journal of Financial and Quantitative Analysis, 45(6).  ·  Custódio, C. (2014). Mergers and acquisitions accounting and the diversification discount. Journal of Finance, 69(1).  ·  Berkshire Hathaway 2024 annual letter and 2026 proxy statement. Q3 2025 cash position from Berkshire 10-Q.

For informational purposes only. Not investment advice. Specific securities mentioned are case studies, not recommendations. Stock performance figures are approximate and based on publicly reported sources as of publication.