In the annals of double-edged compliments, Warren Buffett’s description of his planned $27bn acquisition of Burlington Northern Santa Fe as an “all-in wager on the economic future of the US” ranks highly. If the best expression of the future of the US economy is a railway operator dating back to the mid-1800s, then growth investors might be advised to look instead to China, India or Brazil.
Perhaps to balance his criticism of the US trade deficit and doubts about the dollar, Mr Buffett often eulogises the US economic system. “It has unleashed potential as no other system has and will continue to do so. America’s best days lie ahead,” he wrote in his 2008 letter to shareholders of Berkshire Hathaway.
Actions, however, speak louder than words. The BNSF deal is the largest acquisition Berkshire Hathaway has made and comes as 79-year-old Mr Buffett has started to identify possible successors. So it may be the ultimate symbol not only of his investment style but of how he sees his country.
“When investing, pessimism is your friend, euphoria the enemy,” he wrote in the letter and, underneath his optimistic gloss, the deal has a downbeat moral for the US. It is a safe, predictable but somewhat dull market for the global investor with a lot of solid but ageing companies.
There are, of course, many worse things than dull investments, or indeed dull economies – despite Harry Lime’s scornful remark about cuckoo clocks in The Third Man, Switzerland is a rich country. Indeed, Mr Buffett has made himself into the world’s most talented investor by spurning excitement.
He has preferred to seek out value in, as he phrased it in his 2007 letter, “companies that have: a) a business we understand b) favourable long-term economics c) able and trustworthy management and d) a sensible price tag”.
He also seeks companies with “moats” of competitive advantage to withstand assaults by fresh rivals. “Business history is filled with ‘Roman Candles’, companies whose moats proved illusory and were soon crossed,” he added in 2007.
It follows from this that Mr Buffett would never have invested in the network of railways that make up BNSF in the 19th century, when the US became the world’s first emerging market. It was then a classic high-growth and high-risk industry in which fortunes were won and lost.
It is no stretch to suppose that Anthony Trollope based his fictional railroad in the US south-west in The Way We Live Now, his 1875 novel about crooked capitalism, on the Santa Fe. The line was constructed by Cyrus Kurtz Holliday, a Pennsylvanian who styled himself a colonel and was, as the history of the BNSF tactfully records, “quite the entrepreneur”.
Only now, when US railway operators have consolidated over more than a century, grown more efficient, are run by less colourful characters and no longer face the possibility of someone laying a rival track, do they attract Mr Buffett.
Mr Buffett, who operates from Omaha, Nebraska, naturally invested in US companies when he started. But there are good reasons why the bulk of his investments continue to be made there. The US is a mature economy with a strong legal and regulatory framework where investors have secure property rights. It also has lots of companies of sufficient size and capitalisation to qualify, as he put it in his 2006 letter, as “elephants” that can absorb “Berkshire’s flood of incoming cash”.
It is a great economy in which to invest for value rather than growth. That, however, is not why foreigners have traditionally envied and admired US capitalism.
The brand that most excites and inspires people is found in Silicon Valley, where venture capitalists make big wagers on technology and biotechnology start-ups in the hope of a few achieving the success of Google or Genentech.
Mr Buffett has studiously avoided investing in US technology companies, despite his friendship with Bill Gates of Microsoft, the fact that Mr Gates and Susan Decker, the former Yahoo executive, sit on his board, and his warm words about Google and its co-founders.
He insists he does not understand such companies well enough and is not confident about their moats. “[We] rule out companies in industries prone to rapid and continuous change. Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty,” he wrote in 2007.
Despite this, Mr Buffett has invested in at least one technology company in a rapidly changing industry and country, the Chinese battery and electric car maker BYD (“Bring Your Dream”). He did so in 2007 after being urged on by Charlie Munger, his business partner.
He clearly judged the balance of risk and reward as acceptable in BYD’s case, given its technology and its access to Chinese consumers, while it was offputting in the case of Silicon Valley companies. Or he perhaps regarded BYD’s “price tag” as more sensible than Google’s.
Either way, that deal and the BNSF acquisition signal that he looks to China not the US for growth investments. Buying a railroad is a sound way to gain cash dividends, and broad exposure to companies that need coal and freight, but not to invest in innovation.
It is hard to contest Mr Buffett’s strategy as a means of accumulating long-term wealth, given that it has worked so well. As a judgment on the strength and prospects of the US economy, it is less promising.
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