Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.
I don't often see this sort of pride in America. Normally the flavors I do observe are hyper-nationalistic and filled with bravado, while the tone here is lauding yet reserved. There's a sense of authenticity delivered in the way Warren Buffett - an extremely humble, yet successful man - talks about the way his country has helped him succeed. It's austere.
This isn't part of the regularly scheduled programming for threads about his letters (mostly we like to champion index funds or debate the utility of active investing), but it's what really struck me this time around. Juxtapose his words here with the same category of conversation about America in many other contexts and contrast the integrity involved. In a time when America appears to be experiencing quite a bit of social and political volatility, it is refreshing to hear optimism from a source that does not appear to use it as an instrument of control.
EDIT: Well this has since ignited a debate about America's cultural identity and history of imperialism...not really the spirit of what I was going for but here we are I guess...
As a quick back-of-envelope check: American GDP in 2016 was $18.86 tn.
The son of a bitch wants it at a 4.7 trailing multiple, after a relatively slow-growth year. All that praise - and then a 4.8x multiple. Now I know how he butters up his acquisition targets :)
EDIT: I am getting downvoted, but I am keeping this. You guys don't realize that valuing companies is what he does all day, every day. That's literally his job. When he throws a figure like $90 trillion out for America, that is not casual or haphazard - it took him a few seconds to come up with that, and he did it on some basis. We get real insight into his thinking, especially when it comes following such lavish praise. In my opinion I am making a good contribution in pointing this out. We've just learned something.
"The net worth of households and nonprofits rose to $90.2 trillion during the third quarter of 2016."
Regarding the 90 trillion, I disagree with him. I see a country as a pearl: there's a tiny nugget, a bit of dust or some other small thing that starts the process of creating the pearl inside the shell of they oyster. Then over time more and more mother of pearl is deposited until the pearl is created.
The US mainland hasn't seen a war since 1865. Even the Civil War never touched many parts of the mainland, such as New York or Chicago.
And you've been depositing "nacre" for over 2 centuries at a rate that in the past decade has been around 10 trillion per year. I know that a lot of that wealth doesn't actually come back to the US, a lot of it is immaterial, that there's also a lot of destruction and regeneration even without war, but there's no way I'd evaluate the current wealth of the US at only 90 trillion.
It's got to be at least 10x the current GDP, if not more, in my opinion.
If you don't read this much, then go back and read prior ones, WEB writes this way all the time. I like the guy a lot, but he does.
1) Political stability and the rule of law: No point in investing much in a farm, factory, or infrastructure (fiber!) if it will be burnt down the next day by bandits or seized by someone more powerful (government, the rich family in town, etc.). The same applies to human capital (education): No point in studying computer science if there is no electricity and your life will be a fight for survival with guns and knives.
2) Free people and free markets (as a general principle, not taken to logical extremes): The system that produces the most aggregate wealth from the same labor and capital inputs.
3) Scale: Of developed nations, the U.S. has by far the largest internal market. ~325 million in the US, second is Japan at ~125 million. The UK market is 60 million, for example; that's why the Beatles sang with American accents (AFAIK - and also because the UK and Europe probably were still recovering from two massive wars). Note that Europeans are roughly as productive per capita as Americans. Scale by itself isn't sufficient; China and India have probably always been larger, for example.
4) Geographic security: Protected from enemies by two oceans, and with neighbors too weak to do anything but be friendly. To get a sense of what those oceans mean, look at how hard it was to attack across the English channel in WWII. If the U.S. was in continental Europe, WWI and WWII would have devastated the U.S., twice, just like the rest of Europe - and who would have provided a Marshall Plan to bail out the US along with the Europeans? Instead, thanks to geography, it's only a slight exaggeration to say that not a foreign shot was fired on US soil - and hasn't been since 1812.
5) Geographic economics: According to one geopolitical analyst I read, the U.S. has the largest navigable river system and the largest contiguous area of farmland in the world, and they are in the same place, the Mississippi River basin. Remember that most of the world economy was agricultural for much of U.S. history; imagine the impact of that geography, an almost guaranteed economic engine. Consider how critical controlling New Orleans and the Louisiana Purchase were and are.
But there is also credit to the courage and ingenuity of the early immigrants who took perilous journeys leaving everything behind, risking diseases and an unknown and uncertain future, and made something out of it.
One would like to think those who are proud are proud of this and not the usurpation of a continent or slave trade.
Its the people and way of life that matter. Primary resources can be bought.
In fact land can be a hindrance when it induces Dutch Disease.
This was a gain that was achieved not by starting from scratch but by stealing lands from indigenous people and forcing Africans to work that land. I'm not sure if you can describe the kidnapping, murder, rape and ultimately genocide of multiple people groups as miraculous, unless one subscribes to the idealogy of manifest destiny.
The easiest way to dispel this notion is to show that the vast, vast majority of American wealth (>99%) came about long after slavery had ended. Indeed, if we could return to the economy at the time slavery was in full swing (even disregarding morals), not one rational person would choose to do so. Another way is to compare the US economy to those that didn't discontinue those practices. Or to show that even in current circumstances the US economy continues to grow rapidly, after hundreds of years of doing so.
So, please don't forget the atrocities caused by the United States. But also don't attribute everything that ever happened in the United States to those atrocities. It may be a cheap way to brush aside the success of the United States, but it isn't an honest argument. Clearly there's something else going on that has made the United States the most wealthy country in the world (per capita).
Remember that atrocities like that happened in many places that did not grow into giant economies. Stealing land and enslaving people may have given a head start, but clearly something else delivered the big gains.
If you look at the history and the economic charts, the big boost was started by the industrial revolution.
It also doesn't hurt that the allies gave the US its best technological secrets during the war and the best minds from both sides emigrated to the US during and after the war.
You just described the history of Humanity.
Slaves had to be fed and housed and nominally cared for. After all, they cost money and you didn't want to throw away your investment.
The slavery economy, which is what the South fought to preserve in the American Civil War (let's face it: those who like to hide behind "states rights", it all comes back to "states rights to buy and have slaves"), was a last gasp to try to preserve what was left of feudalism. It was doomed before it began.
Please don't misconstrue this as being "pro slavery". Treating humans as property is an abomination. Even the Romans believed this and enshrined it into their legal codes even though they kept slaves.
And until very recently the former slave owning states were and in some ways remain sleepy backwaters dependent on the largess of the military and welfare to remain viable.
Seeing as how you are saying that the growth of America was dependent on 'stealing' land you must be implying that the success is dependent on the stealing of resources.
Which is trivially proven false by simply looking at South America.
> forcing Africans to work that land
Forcing Africans to work the land stunted American growth. It's not a coincidence that the richest parts of the countries are the ones that industrialized.
I'm not an American, but if you feel quilty because of the past, I'm more than welcome to get a little financial contribution to my life. I'm from small and poor country, no great history or privilege.
But isn't it obvious that neither of these things created the wealth we have today? To my thinking, our current wealth derives from technological innovation, process engineering, psychological insight, most of which would not have been possible without welcoming people from other lands, and being willing to work with those who are different than we are.
Funny how that's not accounted for much these days, but America's historic success as a direct result of African slavery and Native Indian genocide, is.
Right, which is also the same thing many native americans tried to do to the immigrant settlers in the West as well.
One of the hard lessons our society has learned is that putting so much energy into holding a group of people back hurts both those people and society as a whole. Of course, lately I'm wondering whether we need to relearn that lesson.
It's incredible. As a foreigner, I feel like I'm witnessing the payoff some absolutely top-notch patriotic propaganda.
But cue endless comments of lazy nitpicking whatabout-ism that completely miss your point.
Sorry English is not my first language and it is not easy for me to understand such advanced writing.
Is it that you like the sort of pride that quantifies the material wealth of the nation and attributes it to a market based economy and furthermore there are other sorts of pride that do you not like?
I'd go even further: our current presidential administration spends a lot of energy telling us that America sucks because the people in it suck, the government they built sucks, and the ideals they aspire to suck, and that the solution is to deal out cruelty to the right kinds of people.
I don't understand how anyone can listen to that bilge and interpret it as any kind of patriotism at all, but they do. The hyper-nationalism and bravado are a natural result of an underlying emotional condition apparently shared by about a quarter of the populace: an inability to feel pride in anything but the capacity to dominate.
This is why a few sentences by Warren Buffet feel like such a breath of fresh air. It wasn't always like this, Buffet's far more constructive and positive sentiment is perfectly normal.
Wtf are you talking about? This has never happened.
I agree and thanks for sharing.
The biggest challenge now for me with free time is read from those types of sources. Or to just stay off my phone!!!!!
The joy of reading is under attack.
When my parent got near death s/he also framed a very patriotic life full of optimism.
He used this same logic when endorsing Hillary Clinton for President.
He then goes on to show how that's been true, and that a standard index fund outperforms almost every hedge funds even before extra fees to the hedge funds are taken into account.
It's not the first time this has been pointed out, and it suggests that for non-multimillionaires, an index fund is always the most rational choice.
You get close to the return you'd get by investing in real estate, with the added benefit of index funds being much more easily liquifiable.
It's a simplification, but if a hedge fund manager finds a fantastic investment for $100mn, but they have $100bn to invest, they have to be able to repeat that feat over and over and over and over.
Apparently it is hard to come up with a collection of 5 of them that would beat the S&P 500 over 10 years. At least Buffett had a hard time finding counterparties for a bet.
Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. The incentives for professional money managers are also totally misaligned: funds performance is reported quarterly leading to a short term bias; fund managers get a bonus if they invest irresponsibly but get lucky; customers are unsophisticated so it's one big lemon market.
I agree that index funds make a lot of sense for non-millionaires (and single digit millionaires), but that's simply because it takes a lot of effort to beat the market even by a few percent so you need a lot of assets for it to be worthwhile.
Buffet's point is that it's negative-sum. A gambler might win today, but lose tomorrow, and his counterparty will get the opposite, but the house wins on every transaction. While the players churn, the market makers and rent seekers will drain the system of money, in aggregate.
This is not true. There will always be someone who wins less between the two, but it doesnt mean it wasnt a win-win trade. Some things are more valuable to one person than another.
https://www.wealthsimple.com/ (I'm a customer) has recently expanded into the US from Canada and are one of a group of what is being called Roboinvestors which take these index funds and let you easily invest in them.
Wealthsimple adds on 0.5% fee which is still lower then active funds, my portfolio has a weighted MER of 0.64%.
Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.
Non-leveraged real estate investing would give you hardly 1-2 % p.a.
But the market will adjust to cheap leverage. Easy money, house prices go up, you get less value per dollar. So the benefit of leverage is diminished at least a bit.
Hedge funds beat the market before fees [1]. (Mutual funds do not [2].) It's just that hedge fund managers are great at gobbling up that alpha with fees.
One way to look at this is hedge fund investors subsidise the efficient price-discovery function hedge funds provide the market.
[1] http://www.marketwatch.com/story/90-of-fund-managers-beat-th...
[2] https://mobile.nytimes.com/2015/03/15/your-money/how-many-mu...
"Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock"
"It was, nevertheless, a terrible mistake on my part"
"Despite that cautious approach, I made one particularly egregious error"
I bet you don't find that sort of thing in many other annual shareholder letters.
*) read one of his biographies to see he's not afraid to play dirty
Humble is an understatement. The man is a piece of work, that's for sure.
The HBO biographical documentary is insightful:
He was making critical comments about himself before he got famous.
On a related note, I came across a website several years ago that has a lot of info from the annual meeting Q&As, as well as other interviews, etc. It's quite long, but I found it very enjoyable to read.
from page 8:
>One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as claims arising from exposure to asbestos, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float. .... We recently wrote a huge policy that increased float to more than $100 billion
They have $100 billion float. That's incredible.
30,450 pages holy crap
Is he basically saying that the insurance business is structured in such a way to never payout catastrophic amounts? Is this a harmful thing for the insurance claimants?
His thinking on the surface is very solid: insurance business is a cash cow in some regard, and if the market is down, it is actually an opportunity to move that money into equities.
Their insurance businesses don't always make money. There have been years in the past that they posted big losses.
GEICOs moat is customer satisfaction. Obviously selling direct means their product is a great value, and service means hard to get their customers to switch.
buffett profited off the housing bubble and should not be trusted. he owned huge stakes in the ratings agencies that were giving AAA+ ratings to these awful mortgage products, even as publically he was decrying the financial products involved as 'mass destruction' he was making money on it.
he is doing the same with his stock market push. if a million people listen to him and go buy stocks, what do you think happens to his index funds? They go up of course.
absolutely hilarious and sad to watch people worship this guy. if his secret is really to buy index funds, then why do people listen to his speeches and newsletters? you could just go buy index funds and be done with it.
like every other con artist, his genius is to get people to buy in to his story.
Your analysis of the great crash ignores the effects of dividends, which were very high in the thirties and made investors profitable much more quickly than you claim.
The housing bubble burst and BRK is worth far more now.
You don't know what Buffett does, how he got rich, or much about the stock market either.
I.e., I agree with Buffett's general premise, and have since the 1980s.
So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend the savings on other Berkshire products.
I need to get hooked up with my shareholder discount!
He's smart, honest, humble, generous, witty and a great communicator. And he's the best investor in the world.
Normally these letters have some new brilliant insight or dive into a business I know nothing about. This one feels shorter and more peremptory. I see the financials for the major sectors and the same boilerplate explanation of insurance and railroads that's in every letter.
What's up? It's not like nothing happened with Berkshire Hathaway this year.
"See around me," indeed.
