What Warren Buffett Sees in Potential Heir Todd Combs

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Warren BuffettNow that Berkshire Hathaway CEO Warren Buffett has picked fund manager Todd Combs to invest a big portion of Berkshire Hathaway's (BRK.A) money, the next question is: Will Buffett give Combs the keys to his entire kingdom after Buffett retires or passes away?

But the question for today is: Why did Buffett tap Combs? Based on Combs's track record, it's clear that he has done well in financial services stocks while limiting risk. Plus, he shares with Buffett a fondness for old-school-style investing and for writing amusing investor letters.

Combs is a mere 39 years old, and up to now, he managed $395 million in Castle Point Capital Management, a "value-oriented long-short equity fund that focuses on financial services companies," according to Reuters. Castle Point had risen 28% from November 2005 to June 2010 -- pretty good compared to the 49% drop in Castle Point's benchmark, the SPDR Financial Services sector fund.

High Returns With Minimal Risk

Buffett didn't likely hire Combs for his academic pedigree. Fortune reports that he "graduated in 1993 from Florida State University with majors in finance and multinational business operations." And after graduation, he worked for Florida's comptroller, then to GEICO competitor, Progressive Insurance (PGR), where he helped set automobile insurance rates.

Combs started Castle Point in 2005 with seed funding from former Goldman Sachs CEO and Chairman Stephen Friedman. To his credit, the young manager has generated high returns with minimal risk. In 2007, Castle Point rose 19% after gaining 14% in 2006. When the market collapsed in 2008, Castle Point had a relatively small 5.7% loss, and in 2009 it underperformed the S&P 500 -- rising 6.2%. The key for Combs was losing less in down months -- for example, in 20 negative-return months, his losses were 1.8% on average, while the S&P 500 fell 7.7%.

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But beyond the numbers, Buffett obviously likes Combs's style. More specifically, Buffett seems to like the idea of having as an heir someone who shares his reverence for the investing philosophy of his mentor, Benjamin Graham. In his investor letter, Combs echoes Buffett, noting that "at Castle Point we like to think of ourselves as owners of businesses."

Combs also peppers his investor letters with eclectic references to people like Charles Darwin in his discussion of losing money on investments. Combs recently wrote: "(W)e may begin with the acknowledgment of the pervasive reality of failure that, for instance, 99.9% of biological species that have ever existed are now extinct. Or, a little close to home, that only one original member of the Dow Jones industrial index continues to be a member today."

Nobody can replace Warren Buffett, but the Oracle of Omaha is at least giving Combs a chance to audition for part of the job. Berkshire Hathaway investors are likely hoping it'll be a long time before Combs actually takes over Buffett's investing role. Now it's up to the new guy to show his stuff on a far grander stage.



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