This weekend, Warren Buffett released his annual letter as chairman of Berkshire Hathaway. There are some points worth mentioning about it beyond the ones I made last week in my column about an advance excerpt from the letter. They support the idea of Mr. Buffett as an impressive capitalist but one who is also not without his flaws.
Mr. Buffett writes, "We completed two large acquisitions, spending almost $18 billion to purchase all of NV Energy and a major interest in H.J. Heinz. Both companies fit us well and will be prospering a century from now." He also writes, "A century hence, BNSF and MidAmerican Energy will still be playing major roles in our economy."
In some sense this "a century from now" prediction is a safe one, because if it is wrong, it will be hard to call Mr. Buffett wrong about it. In 100 years, Mr. Buffett will be dead; most of Berkshire's current shareholders who are reading the letter now will be dead; and it's not clear that anyone alive in 100 years will be looking back at the Buffett letter to check the accuracy of the prediction. In another sense, though, these predictions are preposterous. To take H.J. Heinz as an example, here are some possible scenarios that would prevent that company from prospering in 2114:
- A dutch-elm-disease like blight wipes out the tomato population, rendering Heinz's flagship ketchup impossible to produce at affordable prices.
- Scientists genetically engineer potatoes that create french fries with a ketchup flavor built in, rendering ketchup unnecessary.
- A competitor arises that develops a better-tasting ketchup. Heinz is slow to react to the threat and loses its dominant market share.
- Doctors discover that ketchup is bad for your health, and regulators ban it.
A hundred years is a long time, and a lot of technological change can happen over that time that can have a big and hard to predict effect on any business.
One of the things I like about Mr. Buffett is his enthusiasm about capitalism, particularly its American variety. "The dynamism embedded in our market economy will continue to work its magic,' he predicts at one point. He sings the praises of Rose Blumkin, who with her family built the Nebraska Furniture Mart business into "the two highest grossing home furnishing stores in the country...each doing about $450 million annually." "Mrs. B never spent a day in school. Moreover, she emigrated from Russia to America knowing not a word of English. But she loved her adopted country: At Mrs. B's request, the family always sang God Bless America at its gatherings." He calls his company's annual meeting "Woodstock for capitalists."
The irony is that some of Mr. Buffett's investments aren't in a truly free-market economy, but in one heavily dependent on government subsidies and regulation. He writes, for example, "When our current projects are completed, MidAmerican's renewables portfolio will have cost $15 billion. We relish making such commitments as long as they promise reasonable returns. And, on that front, we put a large amount of trust in future regulation."
Elsewhere on the public policy front, Mr. Buffett's letter includes a brief reference to underfunded public pension promises: "Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford."