March 6, 2019
The American Tailwind.
Like many, I hold Warren Buffett in high regard. Berkshire Hathaway has long been a large position in client portfolios. It belongs there on its own economic merit, but I also observe that its presence has a positive effect on my thinking, so maybe it’s a bit of what a millennial video gamer would call a “cheat code." Like many, I look forward to the February Saturday when the Berkshire Hathaway annual letter is released, because in addition to the information it contains about the health of Berkshire Hathaway, it also always delivers powerful insights and historical perspective.
This year’s letter did not disappoint. Buffett reminds us of “our prime goal in the deployment of your capital: to buy ably-managed businesses, in whole or in part, that possess favorable and durable economic characteristics. We also need to make these purchases at sensible prices.”
I believe these three criteria should be the bedrock of any long-term investor. It’s interesting to me that Buffett now seems to be placing slightly more emphasis on the importance of management (he once said he wanted to own a business that was so good that an idiot could run it because eventually one would…)
He also indicated a major shift in the metric he would use going forward to describe Berkshire’s performance, away from book value and more toward market value. This is because of the growth of the massive operating companies in the Berkshire portfolio, which, because of accounting rules, must be included in book value at amounts far below their current value. Berkshire Hathaway is a forest containing five “groves” of major importance, Buffett wrote. The many dozens of non-insurance operating companies is the most valuable grove; followed by the grove of public equities, then the group of four companies in which Berkshire shares control, then cash and treasuries. The fifth grove is Berkshire’s property/casualty insurance business, which has been providing the company with “float”—a powerful source of capital, since 1967.
I’ve always admired Buffett’s ability to describe complicated financial and economic subjects in ways that are clear as a bell—he says he writes the letter as if he were writing to his sisters, smart people who don’t spend their lives thinking about finance. It works.
But my favorite part of the letter is a section he titled The American Tailwind. It’s the final section. He said he starting writing it last summer. I think it ranks among his best ever, and while I would encourage everyone to read it in its entirety, I’ll present some of my favorite parts here:
On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.
Let’s now travel back through the two 77-year periods that preceded my purchase. That leaves us starting in 1788, a year prior to George Washington’s installation as our first president. Could anyone have imagined what their new country would accomplish in only three 77-year lifetimes?
During the two 77-year periods prior to 1942, the United States had grown from four million people—about ½ of 1 percent of the world’s population—into the most powerful country on earth… Early in its history our country was tested by a Civil War that killed 4 percent of all American males and led President Lincoln to openly ponder whether “a nation so conceived and so dedicated could long endure…” In fact, the nation’s achievements can best be described as breathtaking…
Let’s put numbers to that claim: if my $114.75 had been invested in a no-fee S&P 500 index fund, and all the dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019… That is a gain of 5,288 for 1…. Meanwhile, a $1 million investment by a tax-free institution of that time—say, a pension fund or college endowment—would have grown to about $5.3 billion.
Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.
Christopher Wren, architect of St. Paul’s Cathedral, lies buried within that London church. Near his tomb are posted these words of description… “If you would seek my monument, look around you.” Those skeptical of America’s economic playbook should heed his message.
In 1788—to go back to our starting point—there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.
Over the next 77 years… the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky—gloriously lucky—to have that force at our back.
There’s not much I can add to what I believe is a particularly eloquent letter. I would only note that Buffett’s reference to Wren made me a little sad when I read it because even though Buffett was talking about America itself, I couldn’t help but notice the parallels between St. Paul’s Cathedral and Berkshire Hathaway. It seemed to me that Buffett was, perhaps even subconsciously, contemplating his own mortality, and I could not help think of how sad I will be when he is gone. As someone who never knew his grandfathers, I suppose I’ve kind of adopted him and I think I’m the better for it.
Lastly, a brief anecdote. I visited Charlottesville, Virginia over the weekend. My son is looking at colleges and we had the good fortune to be invited by some friends to attend a men’s basketball game in beautiful John Paul Jones Arena. As tip-off neared, the color guard took to the floor for the national anthem… and the arena grew quiet. I mean, not quieter. I mean almost library quiet. The respect the UVA crowd had for our national anthem was impossible not to notice. Charlottesville, steeped in history, has been through a lot recently, and it was clear to me that the people in attendance felt a personal relationship to our country and an awareness of it as a precious, living entity. In that solemn moment, the American tailwind was blowing through the arena. And the home team won.
Any opinions are those of Burke Koonce and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.