A year ago Ted Weschler, one half of the duo likely to someday take over the massive Berkshire Hathaway stock portfolio and the even more titanic investing legacy of Warren Buffett, was in a footrace with the S&P 500. Weschler was leading by a nose with a 20% gain, vs. 18% for the S&P, in the first nine months of 2013, according to estimates compiled by Fortune.
Then, in November, one of Weschler’s largest holdings, satellite television provider DirecTV, announced it had signed up an additional 139,000 subscribers. Another Weschler choice, dialysis-center operator DaVita Health, reported better-than-expected earnings. Both stocks shot up. By the end of the year, Weschler’s portfolio had risen another 11%.
In his annual letter to shareholders in April, Buffett revealed that both Weschler and his partner Todd Combs once again “handily” beat the market. “They have made Berkshire billions already that we wouldn’t have otherwise made,” the Oracle of Omaha told CNBC that month. “They both have a fundamental combination of soundness and brilliance.”
What will happen to Berkshire after Buffett, 84, is perhaps the most closely watched succession story in corporate American history. If investors are nervous, they aren’t showing it. This summer the price of Berkshire’s A shares floated above $200,000. The conglomerate, which owns dozens of companies, ranging from insurer Geico to railway Burlington Northern Santa Fe to ice cream chain Dairy Queen, has a market cap of $331 billion. The question is whether Berkshire will be able to continue its stellar success after Buffett.
How Combs and Weschler do will comprise a large part of the answer. As of the middle of this year, the two managed a total of just over $14 billion (their allocation has been increasing) of Berkshire’s $115 billion stock portfolio. This month marks four years since Buffett hired Combs. Weschler joined the company a little less than a year later. A third, yet-to-be-named person will run Berkshire’s operating businesses, which have become a much larger proportion of the company’s assets in the past decade. (Buffett says the person has been picked.) None of the plans are final, and Buffett says he has no intention to retire anytime soon.
Berkshire’s CEO has offered few details on the performance of his handpicked successors. The company is required to reveal its holdings once a quarter, but it has no obligation to explain which manager chose a particular stock or at what price. As a result, just how well the duo have done has remained a mystery.
"They have made Berkshire billions already that we wouldn't have otherwise made." —Warren Buffett
Fortune set out to solve that mystery. We scrutinized public fillings, sounded out investing pros who know Buffett, Combs, and Weschler, and made some educated guesses. (More on our methodology later.) We ended up with what are most likely the current portfolios of Combs and Weschler, as well as a list of all the shares they have bought and sold for Berkshire in the past four years, and at roughly what price. The returns calculated from those portfolios largely jibe with what Buffett has said about Combs and Weschler, and got the thumbs-up from the close Berkshire watchers we showed them to.
Combs and Weschler declined to comment. Buffett says Weschler’s performance exceeds Fortune’s estimates of his results, but he declined to comment further.
So how have the Oracle’s disciples done? Quite impressively, according to our estimates. Both have outpaced the S&P 500 in their time at Berkshire (their compensation is determined by how much they beat that index over three years). Combs has done the better of the two, generating a cumulative return of 116% over the past nearly four years—more than double the S&P’s 55% over the same period. Weschler’s portfolio is up 81%, but he’s had only three years to prove himself. Combs’ picks increased an incredible 51% last year alone. And Weschler is well ahead of the market this year.
"Combs tends to get in and out of stocks much faster than Buffett. Weschler prefers to buy and hold a few stocks for a long time."
Combs and Weschler took unlikely paths to Berkshire. Combs was 39 and ran a fund, Castle Point Advisors, which managed just $400 million, when he was hired by Buffett. Weschler, the founder of a successful hedge fund, Peninsula Capital, wasn’t on Buffett’s radar until he won a lunch with Buffett, for which he paid $2.6 million in a charity auction. Buffett has been critical of hedge funds, but the two hit it off. At the next year’s lunch (Weschler paid another $2.6 million), Buffett recruited him.
A look at the stocks Combs and Weschler have picked since joining Berkshire shows that their investing philosophies have a lot in common with Buffett’s (no surprise there). Both Combs and Weschler have bought into cable-TV providers, including DirecTV, Dish, and most recently Charter Communications, which generate a lot of cash flow and have a so-called business “moat”—it’s hard to get into the business of providing cable television. Those are two traits that Buffett has said he seeks. And just as Buffett loves iconic American brands like Coke and, more recently, Heinz, Combs has purchased shares of tractor company Deere. Buffett is a longtime holder of American Express shares; Combs has opted for Visa and MasterCard.
In other ways the protégés’ strategies diverge from Buffett’s. A good example: Liberty Media and its CEO, John Malone. Both Combs and Weschler have bought shares of various Malone entities, which tend to have complicated corporate structures. Buffett has tended to be wary of the sort of complexity that, in his view, makes it hard to grasp the workings of a business.
Combs and Weschler run their portfolios autonomously, though for compliance reasons they do have to inform Buffett of their selections in advance. Combs tends to get in and out of stocks much faster than Buffett. For instance, Combs prescribed himself $200 million worth of shares in drugstore chain CVS in late 2011, only to dispense with the stake at an estimated 28% profit a year later. Weschler prefers to buy and hold a few stocks for a long time. His $7.5 billion portfolio at Berkshire is spread among just seven stocks.
To crunch their performance numbers, Fortune enlisted the help of hedge fund tracker Insider Monkey for a list, based on public filings, of all the shares that Berkshire has bought and sold over the past four years. Fortune also examined holdings at the funds Combs and Weschler ran before they joined Berkshire. Weschler’s former hedge fund, for instance, owned shares of DaVita. So when DaVita popped up in Berkshire’s portfolio, we inferred that it was a Weschler pick.
Next we talked to some longtime Buffett watchers, some of whom have known Combs and Weschler since before they joined Berkshire. Once we had our best guesses, we went back and double-checked our work with the investment pros. There were some close calls. Lee Enterprise, for instance, owns newspapers, as well as other local publications. Buffett has said that he is interested in buying up smaller newspapers. But others argued the Lee investment is Weschler’s and we included it in his group.
To calculate returns, we used the average price of the stocks that Combs and Weschler were buying in the quarter. That approach may artificially depress our calculation of the men’s returns since it’s entirely possible that skilled traders bought at prices below the average. We did not include dividends in calculating their returns or those of the S&P 500 because Combs and Weschler do not appear to be reinvesting their dividends. Berkshire has yet to file its holdings for the third quarter, so we were able to calculate performance only through the middle of the year.
Combs and Weschler have made some very good investments at Berkshire. Both seem to have a knack for catching stocks near their lows. Weschler bought shares of Canadian oil company Suncor in mid-2013 for around $30 a share; the stock now trades for $36. Shares of credit card company MasterCard have been a big winner for Combs. The shares, then worth $25, were his first investment at Berkshire. Today they trade for $74.
Click to enlarge. Graphic by Nicolas Rapp
Of course, Combs and Weschler have endured a few bumps. Recently Combs has struggled. Shares of Chicago Bridge & Iron, which was an $800 million position in his portfolio coming into the year, have tumbled 30% because of weak construction activity. Overall, Combs’ portfolio inched down an estimated 1% in the first half of the year while the S&P increased by 7%. Combs bought shares of Intel in late 2011 for just over $21. He sold his remaining stake nine months later for under $20 a share.
And shares of General Motors—one of Weschler’s biggest holdings—have fallen 21% this year in the wake of the scandal surrounding the company’s faulty ignition switches. Weschler acquired the shares at about $22, sold some at $36, and is still holding the rest at $32. Other investors might rue not selling more when the stock was above $40 before the recall scandal ignited, but Weschler is a believer: He added $100 million worth of shares in the second quarter.
It’s decades too early to discern whether Combs and Weschler will ever be able to live up to Buffett’s legacy, and, in fairness, that’s far too high a standard. It’s hard to follow a legend. Still, every now and then a Joe DiMaggio is succeeded by a Mickey Mantle.
This story is from the October 27, 2014 issue of Fortune.