I just finished my annual reading of Warren Buffett’s letter to his shareholders–a tradition to be admired. The homespun narrative, self-effacing humor, and honest reflections are certainly unique in the universe of big business. I have been critical of Mr. Buffett at times–not for his investments, certainly, but when he steps away to lecture us on unrelated matters I have stepped up. It seems time for that again.
To assure that my position is not mistaken, let me restate that Warren Buffett deserves every accolade heaped upon him related to the investments he makes in various businesses. There is no qualification. I also greatly appreciate his “buy and hold … and hold” strategy, even in the face of the vagaries of outrageous fortune. Thirdly, I agree with his philosophy of buying quality, exemplified by the following quote cited from this years letter:
“More than 50 years ago, Charlie [Munger] told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases.” – page 13
It should therefore not be surprising that I followed Buffett and Berkshire Hathaway into an investment in Wells Fargo a few years ago that has done very well for me. I trusted that–even though the banks were melting down at the time–Warren and the team had performed an evaluation to pick the best available investment opportunity from the bunch. My four digit Fidelity IRA investment has since doubled nicely, thank you very much.
I depart swiftly from following Buffett when he discusses government policy and general economics, which is where I think he gets seriously into the weeds. Part of this is semantics. When Warren says the word “economics,” the context usually implies either things generally related to money or to a financial analysis of some sort–such as in the evaluation of a company or the profitability of a proposed deal. That is not the sense that I mean at all. For me, economics is a serious study of incentives and the behaviors of people in the presence of those incentives (among other things). So in fairness, we are often talking about two different things. Hearing Buffett speak and reading what he has written over the years however, I am struck by the suspicion that this important distinction may be lost on him. It must be said that nothing in Mr. Buffett’s history or experience that we are aware of, in our albeit limited capacity to understand, in any way prepares him to have an opinion more worthy or more accurate than any other man on topics outside of acquisitions and stock picking.*
In short, if Buffett advises an investment opportunity, listen intently with both ears and consider borrowing the milk money to participate. If he opines regarding tax policy or macroeconomic incentive, he falls from Olympus and shares the level ground with the rest of us.
On that front, let me offer you the following quote, also from this year’s letter:
“MidAmerican’s electric utilities serve regulated retail customers in ten states. Only one utility holding company serves more states. In addition, we are the leader in renewables: first, from a standing start nine years ago, we now account for 6% of the country’s wind generation capacity. Second, when we complete three projects now under construction, we will own about 14% of U.S. solar-generation capacity. Projects like these require huge capital investments. Upon completion, indeed, our renewables portfolio will have cost $13 billion. We relish making such commitments if they promise reasonable returns – and on that front, we put a large amount of trust in future regulation.” – page 10 [emphasis added]
He goes on a bit in the justification of political wrangling with the unpleasant hint of encouragement to support politicians locally who will further such regulation, but the gist of it is that Berkshire Hathaway is making a $13B investment in equipment and technologies that require federal and local subsidies and anti-competitive regulation in order to provide a “reasonable return.” Now, one could say that he is “betting” that such subsidies and regulations are fate accompli. And perhaps that is an intelligent wager, from an investment perspective. But it must be fairly said that now, one of the largest and most respected companies in the world–and all of its shareholders–has a compelling and continuing vested interest in the reallocation of tax dollars to their favor, and in alignment with a certain political dogma, whose end result is greater expense to the general populace (the math does not lie).
That is one powerful set of incentives.
It also makes his personal and consultative relationship with President Obama smart business for Berkshire Hathaway, but a bad deal for the rest of us.
So, on this matter I stand with a sense of my own place in the universe … a huckleberry of sorts to Buffet’s persimmon. But I am confident in my analysis. The last line of this year’s letter says:
“Come to Omaha – the cradle of capitalism – on May 4th and chime in.” – page 24
Cradle of capitalism? When the largest businesses collude with government in such ways, there are other, well-defined terms that are used to accurately describe it (some of them have become so politically charged and mindless that I will avoid using them here). But it is not capitalism as most of us understand it. I am in Omaha, and this little letter might certainly be considered as “chiming in,” but I am not certain that Mr. Buffett will appreciate my participation.
(The author does not currently own any stock in Berkshire Hathaway (BRK.A or BRK.B) and is not an employee, now or in the past, of Berkshire Hathaway (BRK.A or BRK.B). The Name and logo of Berkshire Hathaway, and Warren Buffet’s annual letter to the shareholders of Berkshire Hathaway, are considered copyrights and trademarks of Berkshire Hathaway (BRK.A or BRK.B) and are used here in a fair use, editorial context.)
*Warren Buffett has a degree in Business Administration from the University of Nebraska Lincoln and a masters in economics from Columbia (1951), but the entire focus of his life, even while in school, has been in investing and investment which, as I have said, he does very well.