“So what’s in store for the economy,” asked the hack. “I haven’t the faintest idea”, replied the elderly gentleman, “We never talk about it. It never comes up in our board meetings or other discussions.”
Okay, so maybe we would be better off looking elsewhere for thoughts on the economy. It is just that that this self-confessed ignoramus happens to be Warren Buffett, the richest man in the world, perhaps the most successful investor of all time, and a man who drips wisdom where others of lesser wealth drip jewellery.
And for a man who knows so little, Mr Buffett talks an awful lot of sense, but, and this is what is so fascinating, it’s common sense. Recently, the FT quoted one city analyst as saying, “If something is easy it probably means you have misunderstood it.” Well that can be true – some things are complicated, and yet many successful businessmen will say things like “keep it simple.” And it does sometimes feel as if the underlying cause of the credit crunch was, at heart, the analysts who made things too complicated. The failure of Long Term Capital Management, ten years ago, was surely because the maths behind its business model were so advanced that pragmatic business people didn’t understand it. Common sense can’t be applied to algorithms so advanced that it took the genius of Nobel prize winners to form them. But then, that was its undoing.
Anyway, here are some of the latest pieces of wisdom from Warren Buffett, talking over the weekend at the AGM of Berkshire Hathaway, the company he has owned since the mid 1960s.
On oil, after conceding that part of the cause of the rising price of oil was the falling dollar, he told a CNN reporter, “The possible surplus capacity in the world has narrowed to a very, very small margin. If you go back 20 years ago, the world could have produced 20 per cent more oil than it was using at that time. Now we are using 86 or 87 million barrels a day and we don’t have 96 million barrels a day of capacity, so we are very subject to geo political events, and we are going to be very tight for sometime.”
On ethanol: he was highly critical of this expensive, and apparently inefficient, alternative to oil, rightly saying its use was driving up price of food. He went on to say, “If you can find other bio-fuels sources that don’t get used as an agriculture commodity like corn that would be useful.”
On employment he said, “If you go back a couple of hundred years when everyone was working on a farm, you would have said, if you bring along farm machinery so that horses are replaced where would all these people go? The dynamism of capitalism finds places. Even look at the present situation – shoes, textiles and furniture are coming from abroad now. It is very tough if you are in those industries, but more Americans are employed than ever before. So we have an economy that finds ways to employ people, who would have guessed the software industry would have developed or even airplane industry, so you will see a different world in terms of how Americans are employed in 50 years from now, but they will be employed.”
And on the dangers inherent in recession: “The world is going to be a lot better in 20 or 40 years from now, but we will have a number of recessions in that time. I think the current recession will be longer and deeper than people think – But if I hear about a business that makes sense I will buy it and I won’t give a thought on how it will do in the next quarter of next year.”
And finally, here is something for you to mull over.
“We are happy to invest in businesses that earn their money in euros in France or Italy or sterling in the UK, because I don’t have a feeling that those currencies are likely to depreciate against the dollar,” said the sage. Note that about sterling – he doesn’t think the pound will depreciate against the dollar. In that one respect only, Mr Buffett’s comments go ever so slightly against common sense, after all, the UK and US economies have strong parallels, both suffer from too few exports and too many imports, both seem to struggle with a currency that is too high. But the UK’s economic cycle seems to be lagging a year or so behind the US, and this will suggest a weaker pound later this year and next. Only time will tell if Mr Buffett got that particular call about sterling right.
