The other side of Warren Buffett
Don’t Buff it up
An investing hero is not a model for how to reform America’s economy
WARREN BUFFETT has long dabbled in politics. In the mid-1970s he developed a taste for exclusive Washington dinner parties. In the 1980s he spent a weekend being Ronald Reagan’s golf partner. He helped Arnold Schwarzenegger become the governor of California in 2003 and in 2008 John McCain and Barack Obama both hinted that they would like Mr Buffett to become their Treasury secretary.
This year America’s most famous investor has spoken out loudly on political affairs—aged a liberating 85 and with a left-leaning credo. The latest of his annual letters to investors, which usually confine themselves to folksy jokes and dissections of insurers’ reserve ratios, has a passionate repudiation of the bleak national mood. “For 240 years it’s been a terrible mistake to bet against America,” it declares. On August 1st Mr Buffett was on stage with Hillary Clinton in Omaha and laid into Donald Trump’s character and business record.
If the intensity of Mr Buffett’s interventions has risen over time, so has the seriousness with which they are taken. This partly reflects his financial clout. Berkshire Hathaway, his investment vehicle, is worth $363 billion and is the world’s sixth-most-valuable firm. He is at least 20 times richer than Mr Trump. It also reflects Mr Buffett’s popularity: 40,000 people attended Berkshire’s annual meeting in April, compared to 5,000 two decades ago. Since the death of Steve Jobs, the boss of Apple, Mr Buffett has become the lone hero of big business in America. He stands for the promise of a nostalgic, fairer kind of capitalism.
But Mr Buffett is not as saintly as he makes out. He has to act in his own interests, and he does so legally, but if all companies followed his example America would be worse off. An example is his oft-expressed sympathy for workers. In 2013 Berkshire partnered with 3G, a Brazilian buy-out firm renowned for swinging the axe at acquired firms. Since 3G engineered the merger of Kraft and Heinz (Berkshire owns 27% of the combined firm) last year, staff numbers have dropped by a tenth.
Last year a hedge-funder, Daniel Loeb, attacked what he called a disconnect between Mr Buffett’s words and his actions. “He thinks we should all pay more taxes but he loves avoiding them,” he said.
Mr Loeb was right: Berkshire’s tax payments have shrunk relative to its profits. Last year the actual cash it paid to the taxman was equivalent to 13% of its pre-tax profits—this is probably the fairest measure of its burden—making it one of the lightest taxpayers among big firms (see chart).
Mr Buffett is a vocal critic of Wall Street, but during the crisis of 2008 he stepped in to support Goldman Sachs. Berkshire was a core shareholder in Moody’s, a credit-rating agency at the heart of the subprime debacle. And the group has a big financial-services business of its own, mostly active in insurance, with $250 billion of assets, as well as 10% of Wells Fargo, America’s largest bank (by market value). This portfolio has escaped being classified as systemically important by national regulators.
Mr Buffett often expresses strong views on how firms are run; he joined 12 other prominent bosses last month to demand better governance. One recommendation was that corporate accounts should follow generally accepted accounting principles (GAAP). But Berkshire encourages investors to use its own performance methodology, based on the concept of “intrinsic value”. Mr Buffett’s first wife was on Berkshire’s board until her death in 2004, and his son may become its next chairman.
Such inconsistencies are inevitable in a long and vigorous business life. But there is another problem with Mr Buffett: his fondness for oligopolies. After being disappointed by returns from textiles in the 1960s and 1970s, and then by shoe manufacturing and airlines, he concluded his firm should invest in “franchises” that are protected from competition, not in mere “businesses”. In the 1980s and 1990s he bet on dominant global brands such as Gillette and Coca-Cola (as well as Omaha’s biggest furniture store, with two-thirds of the market).
Today Berkshire spans micro-monopolies such as a caravan firm and a prison-guard uniform maker, and large businesses with oligopolistic positions such as utilities, railways and consumer goods.
As more money has followed his example, America’s economy has become Buffettised. Among investors there is a powerful orthodoxy that you must own stable, focused businesses with high returns and market shares and low investment needs. Managers have obliged. Of America’s top 900 industries, two-thirds have become more concentrated since the mid-1990s. Last year S&P 500 firms reinvested only 45% of the cashflow they generated. Protecting margins and cutting costs is the priority. Economic growth suffers as a result.
Like Jobs, Mr Buffett seems to be able to create a reality-distortion field around him to deflect criticism. In bookshops, for every copy of Mr Trump’s auto-hagiography, “The Art of the Deal”, or Kim Kardashian’s book of auto-pornography, “Selfish”, there are scores of tributes to a ukulele-playing Nebraskan who reads accounts for fun. And for his investors his career has of course been a triumph, with Berkshire achieving a compound annual return of 21% since 1965, double that of the S&P 500. Parts of Mr Buffett’s approach might benefit society if widely adopted—for example owning shares for long periods. He has been dogged in sniffing out wrong conduct, for example at Valeant, a drugs firm that has run into trouble. His plan to pass on most of his wealth to the Gates Foundation, a charity, is exemplary.
But he is far from a model for how capitalism should be transformed. He is a careful, largely ethical accumulator of capital invested in traditional businesses, preferably with oligopolistic qualities, whereas what America needs right now is more risk-taking, lower prices, higher investment and much more competition. You won’t find much at all about these ideas in Mr Buffett’s shareholder letters.