‘Investing in the future, not the past’ is the theme for this month’s magazine and sounds eminently sensible. Obvious even. Surely it would be madness to invest in ‘old’ industries like oil and gas, or traditional high-street retailers, when exciting ‘digital age’ sectors and businesses abound. But perhaps this is too simple.
"Growing inflation fears of late could finally portend the end of the four-decade long bull market"
One investor who has built an unrivalled reputation buying ‘old-world’ businesses is Berkshire Hathaway’s Warren Buffett. His 2020 Chairman’s Letter released last month makes for great reading, whether on the aforementioned old-world businesses or on other topics. The following constitutes what I thought were the particularly interesting messages in the letter, which investors everywhere may find useful.
In the section titled ‘A tale of two cities’, Buffett notes that: “Today, with much of finance, media, government and tech located in coastal areas, it’s easy to overlook the many [corporate] miracles occurring in middle America.”
He mentions Berkshire’s holdings in four companies in particular – National Indemnity, Nebraska Furniture Mart (NFM), Clayton Homes and Pilot Travel Centres – as simple but successful businesses based in Tennessee or, like Berkshire, in Omaha.
Behind each of the four companies is a story of personal endeavour, something that is common to many if not all Berkshire’s investments. Indeed, in the case of two of the four companies, Buffett invested without requesting an audit, basing decisions to buy solely on his judgment of the owners’ characters.
How could one not admire NFM’s founder Rose Blumkin, a Russian immigrant who arrived in Seattle in 1915, worked daily until she was 103, and insisted on singing Irving Berlin’s ‘God Bless America’ at family gatherings? And, with just $50 in the till and on deposit in 1946, the company now owns the three largest home-furnishings stores in the US.
It is arguable whether the four companies are ‘old world’. The insurance, furniture, homebuilding and travel industries do not scream “digital age”, but I suspect the four Berkshire companies have kept up in relation to technology where necessary. A more likely source of success is, says Buffett, an appreciation that, for what may be considered discretionary consumer products, “the customer is the boss”.
Buffett’s observations about bonds are stark. He notes they “are not the place to be these days” and that “fixed income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future”.
Last year – and these are my musings, not Buffett’s – Covid-19 provided the bond market with what may turn out to have been a ‘last hurrah’. Moreover, growing inflation fears of late could finally portend the end of the four-decade long bull market.
In past periods of rising inflation, bonds have proved riskier than equities, the reason being that while there is nothing a bond can do to protect itself, companies (equities) have options such as raising prices, cutting costs, shifting production etc. Like Berkshire’s insurance businesses, retirees may now be better off with equity-heavy portfolios, uneasy though that may feel.
Finally, a mention of two of Berkshire’s ‘big four’ investments, what Buffett calls its “jewels”. Burlington North Santa Fe (BNSF), North America’s largest rail freight company, and Berkshire Hathaway Energy (BHE) seem as close to asset-heavy, old-world businesses as one could get.
What makes them interesting is that they are oligopolistic and sell products that will remain much in demand. However, they will also require huge capital expenditures “for decades to come”.
BHE is spending billions on updating its grid to facilitate the shift from coal-based electricity generating near cities to wind and solar often in remote areas.
BNSF’s capex is more maintenance- related, given railroading is an “outdoor sport, featuring mile-long trains obliged to reliably operate in both extreme cold and heat, as they all the while encounter every form of terrain from deserts to mountains.”
Nevertheless, assuming new operators do not appear from out of the blue and decide to spend billions on building transmission lines or rail track right next to BHE’s/BNSF’s, the companies should retain strong pricing power that will enable them to “deliver appropriate returns on the incremental investment”.
Buffett’s key message is that investing in simple, old-world businesses is not about investing in the past but about investing in their people. A sole focus on “digital age” companies may be unadvisable. Unnecessary even.
Published in What Investment
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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