Warren Buffett takes a seemingly cavalier approach to leadership succession plans. The 80-year-old investing legend likes to insist that when it comes time for him to step down from Berkshire Hathaway (NYSE: BRK-B), very little will change. After all, the Berkshire has a deep bench of executives, all of whom are well-schooled in the firm’s winning investment philosophy.

In reality, a change in leadership at Berkshire brings significant risk. First, Buffett’s unique intellectual skills can be hard to replicate. Simply mimicking his approach is not the same as thinking creatively, as he does. Second, even if such a successor were a very solid candidate, it will be hard to follow Buffett’s plain-spoken folksy style that really connects with investors. A successor that lacks Buffett’s charisma may not be able to retain the key relationship between Berkshire and its investors, turning the firm into just another anonymous mega-sized investment organization.

Since Warren Buffett dropped hints at a March 21 conference in India that Berkshire insider Ajit Jain could easily assume the reins, investors need to take a close look at his background and style. Could he really fill those giant shoes?

A deeper look
The 59-year old Jain is well-versed in all-things Buffett. He’s been with the firm for more than 20 years, most recently running Berkshire’s reinsurance group (which provides back-up insurance to insurance companies when major claims arise). Buffett has said that the Jain-led reinsurance group has delivered out-sized profits to Berkshire. That tells us Jain is an expert in this industry, where the ability to price risk policies can be the difference between big losses and big profits. (Just ask AIG (NYSE: AIG)). The fact that Berkshire’s insurance divisions generate consistently stable and robust returns is a clear feather in Jain’s cap.

Here’s what Buffett wrote about Jain in a 2010 letter to shareholders:

“Ajit (Jain) insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business,” adding that “by his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

If I were looking to launch a reinsurance business from scratch, I would love to hire this guy. But if recent deal-making is any guide, Berkshire may be starting to diminish the role insurance plays in the Berkshire portfolio. In the past two years, the company has spent a collective $44 billion to acquire a railroad (Burlington Northern) and a specialty chemicals company (Lubrizol). Berkshire’s investment team went “outside the box,” identifying a clear disconnect between current market value and the total value of future cash-flow streams. You need deep industry understanding of the transportation sector, for example, to know that railroads’ cash flows won’t be threatened by the trucking industry. Jain appears to know the insurance business well.

Of perhaps greater concern, Mr. Jain would be hard-pressed to be the inspiring face of the company. Admittedly, Berkshire is a deep, strong team and it’s not just about Buffett. But he deserves major credit for establishing a loyal shareholder base though his strong track record and his folksy aphorisms.

Action to Take –> It’s generally assumed that Berkshire Hathaway will continue to flourish long after Warren Buffett is gone. Is that really the case? Are his understudies just as savvy as he is? We can’t know. Even if they are, some Berkshire investors are going to decide to move on when Buffett does, simply because he is the reason they hold shares.

So there is real risk in this transition. I’d be inclined to start selling into rallies as the Buffett era comes to a close. He may stick around for another five years or more, or may he look to retire very soon. When that happens, look for moderate shareholder churn as some investors book profits in what has been a great trade.

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America’s electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here’s what’s going on…