As of 10:30am this morning Berkeshire Hathaway is down 5.6% on the news that Warren Buffet is retiring at the end of the year. At first blush, this makes sense. Buffet is an irreplaceable input into their production function. However, the man is 94 years old, a full 24 years after nearly everyone retires, so this was not exactly an unforseeable event. Why wasn’t more of this already baked into the price? Further, this would appear a far better outcome – announcing retirement more than 6 months in advance- than a more sudden and unfortunate event, such as the passing of a man in his mid 90s. It’s not unreasonable to suggest that both event possibilities would be baked into the price and, with his retirement beingthe better outcome, thus the price could have even gone up.
To me, this is a reminder that there limits to how much Knightian uncertainty can be baked into a price. Put another way, it is a reminder of the costs that uncertainty (nearly?) always imposes on markets. We would all, voters and legislaters, be wise to remember that as the current Presidential administration continues to inject seeming daily boluses of constitutional, existential, and economic uncertainty into our lives.
Economist Writing Every Day 