Matthew Rose, CEO of Burlington Northern Santa Fe Corporation, which is about to be bought by Berkshire Hathaway, conducted an in-house interview with Warren Buffett about the pending acquisition. BNSF filed the transcript of the interview as a 425. This excerpt in particular planted a little seed in my head:
MKR: Okay, next question. In 10 years, how will you evaluate the acquisition of BNSF, whether or not it's been successful?
WB: Well, I -- I'll measure it against my own standard, which is that I have made a bet on the country doing well. And if I'm wrong on that, that's my fault and not anybody at BNSF's fault. But i will look at how it does compared to other railroads. I'll look at how railroads are doing versus trucking and all of that. But in the end, I don't really worry about that very much. I, I've seen what's been done here. I think I know how the country is going to develop. I think the west is going to do well. I'd rather be in the west than in the east. So I really don't have much of a worry about that.
That last little part caught my attention as I stared out my window towards the east side of Manhattan. Why does he think the west will do better than the east? It's a multi-decade grand thematic kind of question, not the business-specific kind Buffett usually addresses. And I'm not sure how easy it is to predict these kinds of things. I doubt many in 1979 were predicting that New York, then near-bankrupt, would soon re-emerge as the capital of the universe. On the other hand, as early as the late 1960s political scientists were forecasting a population shift towards the Sun Belt, and that turned out to be true. Maybe Buffett's prediction is a continuation of that prediction. Maybe it's a prediction about the continued rise of China, or it has something to do with being long commodities. I don't know.
I come from a people who like to wander. Sometimes we've chosen to wander and sometimes others have chosen for us, if you know what I mean. I was born in a different country (Australia) than my sister (South Africa), and we were both born in different countries than our parents (Israel and France), who were themselves born in different countries than their own parents (Lithuania, Translyvania, South Africa and South Africa again). But we arrived in the Unites States when I was about three and except for thousands of trips across the Hudson River and back, we've more or less stayed put ever since. Until recently it never occurred to me to live anywhere else.
The last one urged people to "buy American" stocks. This one is a warning about the side effects to be expected from the extraordinary fiscal and monetary measures that have been taken to turn around the economy.
A little background: Buffett's father Howard was kind of a psychopath about inflation--he thought FDR would turn the US into the Weimar Republic. His son was never as bad, but throughout his career the specter of inflation has always guided his investment decisions. In 1977 he wrote an essay for Fortune called "How Inflation Swindles the Equity Investor" which is the best analysis of the effect of inflation on corporations I've ever read.
Buffett almost guarantees that one day the United States will face higher inflation as a result of the actions being taken. Yet here we sit with the 10-Year Treasury yielding 3.53%.
P.S. Some might argue that this op-ed conflicts with the last op-ed he wrote, in which he urged Americans to buy equities. If we're in for inflation, stocks will do poorly, like they did in the 1970s. But read the first op-ed closely and you'll see that Buffett recommended only that Americans buy equities as an alternative to cash, which is perfectly consistent with his thinking in the second op-ed. In fact, if you fear inflation your money may be best off in equities (public or private, in the sense of being a business owner), even more so than gold.
Disclosure: Long Berkshire Hathaway
P.P.S. If you're a member of SumZero, you can see my write-up of a stock I think will do well in an inflationary environment.
Today I attended the annual meeting of Leucadia National Corporation, and again Ben Claremon produced awesome notes.
I was intrigued by how strongly Cumming and Steinberg rued their failed program of investing in outside managers, which they're currently working hard to undo. Their basic mistake, they said, was thinking other people were smarter than they were and giving them money.
It's amazing that the Leucadia guys, who've had success over the years identifying operating managers for their various ventures, and who are great investment managers themselves, nontheless failed at identifying outside investment managers. It's further evidence for the proposition that skill at investing and skill at investing in investors are two separate things.
Ironically, the best investors in investors in the room today were the old-time Leucadia shareholders (you could tell who they were), who long ago gave money to people they thought were smarter than themselves, and turned out to be very right, and very rich.
Richard Beales of breakingviews.com writes about Berkshire's post-Buffett future:
Other big units are important too, including the Mid-American electricity business run by David Sokol and Greg Abel. And of course the post-Buffett investing team will matter, as well. But with Buffett planning to separate the top executive and investing jobs he currently fills, both roles seem certain to be narrower in the future.
That raises separate issues as to whether the Berkshire investing-operating hybrid structure - which Buffett and long-time investing partner Charlie Munger (himself 85) have created over 40 years - can continue so successfully without them.
In my opinion there will be two big disadvantages to the fact that Buffett's role will be split after he's gone. The first is obvious: none of Buffett's successors will be as good as he is.
Second, which I don't see discussed much, is that the coordination of capital across and within the balance sheet will suffer. All corporations must decide how to deploy capital among various assets--in Buffett's case that largely means deciding whether to buy partial stakes in publicly traded companies or to buy majority control of operating businesses, or simply to hold cash equivalents. Currently the locus of that decisionmaking is Buffett's head. He doesn't have to consult with anyone. In the future, it just won't work as well when the CEO successor in charge of doing deals will have to coordinate with the CIO successor in charge of buying stocks over how to deploy assets.
Similarly, there will be coordination problems across the balance sheet, right to left. Buffett is the CEO and CIO, but he's also the chief insurance underwriting officer as well. Think of a bank: the left side of the balance sheet is in charge of making loans at attractive rates, the right side is in charge of accepting deposits at attractive rates, but what makes a loan's rate attractive depends on the rate you're paying on deposits and vice versa--that's why bankers think in terms of spreads.
An insurance company is fundamentally the same--it "borrows" money not from depositors, but from policyholders, and invests the resulting float in either operating companies, equities, bonds, or cash. I don't think Buffett has ever said so explicity, but I believe he coordinates the price of the right side of the balance sheet with the opportunities available on the left side--he also thinks in terms of spread.
Again, all this currently goes on in Buffett's head alone, but in the future is insurance successors will have to coordinate with his investing and operating successors, and it won't work as well.
Disclosure: Long Berkshire Hathaway
5/8/09 Update: The Wall Street Journal has the same idea.