Forget all the trash talk about America’s glory days being over – Warren Buffett is talking up the USA. One of the world’s most successful investors, whose vehicle Berkshire Hathaway has delivered a 20.2% compound annual return since 1965, Buffett reckons that once the housing market revives, the US economy will follow suit.
Meanwhile, Berkshire, which owns reinsurer General Re, Fruit of the Loom and International Dairy Queen, as well as stakes in American Express, Coca-Cola and energy company Conoco-Phillips, is making record numbers of US investments, ensuring that when the recovery arrives, shareholders will reap the rewards.
What’s behind Buffett’s confidence? “I am 100% sure that people in this country will be doing more business ten years from now than they are today,” Buffett told Time Magazine’s Rana Foroohar last month.
The ‘Sage of Omaha’ insists it’s more than just patriotism talking. He believes that America’s demographics are in its favour and its companies are now in better shape than before the crisis. In other words, it’s only a matter of time before the economic engine coughs into life once more.
Recent encouraging economic data lends some credence to this view, with US unemployment down in December. For his part, Buffett claims that almost all of his major businesses outside of the housing sector have enjoyed “several strong quarters”.
Throughout the financial crisis, Buffett’s faith in America has remained unwaivering. In his most recent letter to Berkshire shareholders, he wrote: “Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America,” he points out. “Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: human potential is far from exhausted, and the American system for unleashing that potential… remains alive and effective.”
In fact, the US economic slump has provided rich pickings for Berkshire, who hasn’t been shy of putting his money where his mouth is. As Foroohar points out, Buffett forked out $15.6bn on US-based companies less than a month after the 2008 failure of Lehman’s.
A year later, he spent $33bn on Burlington Northern Santa Fe, America’s second biggest railroad. He and investment partner Charlie Munger reckon the business will increase Berkshire’s “’normal’ earning power by nearly 40%” before tax. The purchase was partly a punt on rising energy prices. Buffett’s rationale is that, when business picks up, railways will benefit from any increase in moving goods, because it’s much cheaper to haul goods by train than by road.
That said, Buffett’s strategy does extend outside America. His investments in Kraft, Procter & Gamble and Coca-Cola, for example, Foroohar stresses, are essentially plays on emerging markets rather than the US market.
Meanwhile, Buffett’s tough stance on corporate America is ruffling feathers. Although he rules out curbs on executive pay, he believes in what he calls “shared sacrifice” – higher taxation for the rich to subsidise those doing “useful things in society”, such as teachers and soldiers. He’s also keen to see short-term speculators pay higher taxes on the gains they make than investors in for the long haul.
What’s more, Buffett thinks directors of companies rescued by the taxpayer should forfeit five years’ pay, while chief executives and their spouses should “be on the hook for their net worth”. It might not win him many fans on Wall Street, but it’ll certainly keep his image as ‘the people’s investment guru’ well polished.