I just finished reading the latest annual report from Mr. Buffett’s Berkshire Hathaway. These days, many market participants frequently focus on short-term trades, instant gratification, and constant re-balancing of their portfolios. Warren Buffett and his mentor Benjamin Graham have always been proponents of “buying a business” rather than a “stock,” and I think we can all learn from this. Here are my favorite tidbits from his latest release:
“After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent. Our maintaining first-class service is not only vital to our shippers’ welfare but also important to the smooth functioning of the U.S. economy.”
Warren focuses on improving his investments, and pushing them forward. By investing an additional 5.8 billion into his BNSF holding to improve service, he is nodding to the stakeholders that he’s in this for the long-haul. This attitude can improve employee morale, and really help the railroad gain competitive advantages that are resilient to short-term trends.
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.) For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.
This important section of the letter represents Buffett’s view on America’s future. While we deal with these presidential debates and political nonsense, it’s important to realize that democracy is still thriving in our country. It’s comforting knowing that one of the most successful businessmen in history has a very positive view of our nation’s future.
Earlier, I told you how our partners at Kraft Heinz root out inefficiencies, thereby increasing output per hour of employment. That kind of improvement has been the secret sauce of America’s remarkable gains in living standards since the nation’s founding in 1776. Unfortunately, the label of “secret” is appropriate: Too few Americans fully grasp the linkage between productivity and prosperity.
Living in Pittsburgh, there is certainly a negative attitude about the Kraft Heinz merger and all of the subsequent layoffs. Many people who worked at Heinz for years were laid off or re-positioned. I can certainly understand their distress, and their negative views on the situation. However, in order for our country to continue to prosper, there must be gains in productivity. The operating efficiencies that are the end-goal of this merger will be realized, and eventually gains in productivity will be realized. The displaced workers will obtain other jobs or create new businesses that will spur even further innovation into the economy.
I know it’s easy for me as an outsider to analyze this, but I truly believe that our future generations will benefit from productivity increases. Our country is ever-changing. When one industry or company operates at the same output while using fewer workers or resources, we get productivity gains. These displaced workers or resources can then be used in other industries, or even used to create entirely new industries.