Buffett reminds us we need to sing praises of wealth creation
My pilgrimage this weekend to Omaha, Nebraska, to attend Berkshire Hathaway’s annual shareholder meeting is not only a big tick off the bucket list, but also a timely window into the mind of an investor who boasts a track record that has turned $100 (£76) in 1965 into a cool $2.4m today. Warren Buffett, who turns 89 in August, is the undoubted megastar of the investment world; attracting over 30,000 people from across the world to an annual carnival of capitalism that has become a regular fixture on the first weekend in May.
Buffett, together with his 95-year old business partner Charlie Munger, are the gift which keeps giving: not just in terms of long-term returns – but also their investment homilies. This folksy advice is the hallmark of the chairman’s annual letter to shareholders and a key feature of the meeting’s marathon Q&A session.
As well as adulation, Buffet and Munger will inevitably face some tough questions. At least three tricky topics have become a recurrent theme for keen followers of Berkshire Hathaway.
The first is the current underperformance relative to the S&P 500. Although not as sharp as the fallback during the dotcom boom at the turn of the millennium, it is the longest period of relative stagnation in 54 years. With assets of over $700bn (equivalent to the size of the Swiss economy) at some point Berkshire was always going to fall victim to the base effect: the bigger the size of the portfolio the more it takes to move the needle.
The immediate aftermath of the 2008 financial crisis provided a “once in a generation” opportunity to deploy capital at scale in marquee names, like Goldman Sachs and Bank of America, generating handsome returns. Attempts to replicate this success have also been made with non-financial companies, through large-scale buyouts, such as Heinz and Kraft – but
with more mixed results. So far, Berkshire has predominantly been a stake in “America’s Tailwind”, as Buffett describes it. The backing for Occidental’s bid for Anadarko this week – creating a leader in US shale
– is yet another example. But, as the pattern of world GDP shifts towards emerging markets, it will be forced to internationalise as acknowledged in the latest shareholder letter: “We hope to invest significant sums across borders.”
Based on Buffett’s recent comments, some of this could be directed towards our own shores. Berkshire’s track record with UK investments, though, is patchy: the most established presence is providing capacity for the London insurance market and also ownership of electricity distribution assets in the north of England. The more recent stake in Tesco was, however, viewed as a mistake. But a disorderly Brexit might create another “once in a lifetime” opportunity, this time to acquire sizeable UK assets for “pennies in the pound”.
The second and related topic is what Berkshire will do with over $100bn in cash. Having rejected the payment of dividends, and in the absence of an “elephant-sized acquisition”, the only alternative is to consider share buybacks. Indeed, the company has already started to soften up shareholders to the idea that, over time, Berkshire will be a “significant repurchaser of its shares”.
However, the most sensitive question of all is what happens when Warren Buffett is not there. Although
Buffett’s legacy has been promoting an appreciation of the virtues of capitalism among ordinary Americans
a viable succession plan is in place, investors will inevitably suspend judgment until they see tangible results. What matters most is the market’s perception of the successor’s ability to deliver consistent outperformance. Investment trusts often trade at a discount or premium to book value depending on the reputation and record of its managers. If Berkshire traded at a persistent discount under new leadership, then calls for a break-up would start to mount, in turn making Buffett’s legacy harder to defend.
But Buffett’s biggest legacy by far (apart from donating the majority of his wealth to the Gates Foundation under The Giving Pledge) has been promoting an investment culture and appreciation of the virtues of capitalism among ordinary Americans using the power of communication – and through his own living example.
It is a phenomenon that the UK also experienced for a period, under Margaret Thatcher’s premiership, as she promoted a share-owning democracy backed by an ambitious privatisation programme. This mission has long since become stale and gone into reverse. While over half of Americans own stocks, the number of individual shareholders in UK has been falling steadily, now standing at less than one in five adults.
More worryingly, too many citizens have lost sight of the importance of wealth creation. The merits of expanding the size of the pie might seem self-evident. Yet, whenever I travel around the world and return to the UK, I cannot help but observe that British politics is focusing either on the zero-sum game of redistribution or reconciling itself to below-trend economic growth of 1pc to 1.5pc.
In a recent debate on the economy in the House of Lords, I noted that we cannot meet the British people’s aspirations for higher living standards and better public services without raising our sights and becoming much more ambitious about promoting prosperity. We should not be content with mediocrity and need to guard against reacquiring the British disease that became a leitmotif of our stagnation in the Seventies. If the US, an economy more than seven times the size of our own, can still grow at 3pc – adding the equivalent of Sweden in a single year – then surely we can do better.
That is what Warren Buffett reminds us of this weekend in Omaha: it is important to celebrate, and not be embarrassed by, wealth creation. A capital-owning democracy, where everyone enjoys a stake in the future, is the surest way of spreading prosperity and transforming society.