Greetings from the last day of February. It’s a day that both Warren Buffett and gold can relish. Of course gold isn’t a person. It’s a lump of metal that sits there and looks pretty. But it can preen if it likes. So far in 2016, it’s out-performed government bonds, corporate bonds, stocks and all comers.
And Buffett? Berkshire Hathaway’s CEO held forth last week in the annual letter to his company’s shareholders. The older he gets, the more he looks like Moses coming down from Sinai with new commandments for the punters. The letters are always worth reading. You can read past letters here.
If you’re wondering why so many people find the thoughts of an octogenarian, Cherry-coke drinking, ukulele-playing, America-loving investor so interesting, there’s more to it than his success as an investor. He has a way with words. Here’s an edited excerpt from the most recent letter (emphasis added is mine):
[M]Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. In real terms that is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
All families in my upper middle-class neighbourhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbours now do.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious… The good news, however, is that even members of the ‘losing’ sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve.
Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, ‘search’ is invaluable to me. (I’m not ready for Tinder, however.)
They’re never without controversy, particularly his rosy predictions about the USA’s future. But Buffett’s letters are a reminder that as an investor, you’re not buying a mere piece of paper. You’re buying a piece of a business. And if you want to know what you should pay for the piece of paper, or what it’s worth, you have to focus on business issues. It’s refreshing to talk about good and bad businesses rather than good and bad monetary policy.
Of course you can’t forget that Buffett’s had the good fortune to spend most of his investment career in a US-dollar denominated bull market with low interest rates. That kind of environment can make a lot of people look good. Yet he’s managed to look better than most. And his letters to shareholders show why.
Category: Economics