Warren Buffett Versus American Capitalism

Warren Buffett, in the eyes of JPMorgan Chase’s CEO Jamie Dimon, represents “everything that is good about American capitalism and America itself — investing in the growth of our nation and its businesses with integrity, optimism, and common sense.”

Does he really?

As he prepares to step down from the helm of his great investment vehicle Berkshire Hathaway Inc. — when he will be 95 — Buffett is firmly established as a role model for American capitalism. Dimon’s view is not controversial. And yet Buffett’s career can be read as one big argument against capitalism, particularly as the US now practices it.

Buffett’s charm makes life hard for critics. Books about him proliferate even though his own writing is so quotable that there’s no need for further interpretation. Not only hard to criticize, he is also very, very difficult to dislike.

Further, his greatness as an investor is indisputable. Generations of academics and financial journalists have tried to explain away what he does. Countless investors use his techniques without coming close to matching his returns. Compare his record to everyone else who has ever put money into the stock market, and Berkshire is such an outlier as to seem impossible. Just as the laws of physics allegedly prove that bees cannot fly, so the academic efficient-markets theories that underpin the management of trillions of dollars imply that Buffett is not just difficult but impossible. But bees fly, and Buffett beats the market.

This makes him a living rebuke to modern Wall Street. Investment management used to be about taking considered judgments, doing hard bottom-up work, and buying stakes in a few companies that appeared to be good. Managers who owned a stock also owned the company and behaved accordingly, rigorously acting as stewards of the executives.

Quantitative finance involves slicing and dicing in an attempt to make risk go away — and Buffett warned in 2003 that it created financial weapons of mass destruction. The Global Financial Crisis of 2008 proved him right, but the robotic approach still rules. Investors are driven by indexes. These days, they tend to say they are “overweight” a stock, not that they “own” it. The notion of ownership has become so frayed that when a manager is “underweight” (meaning the stake is smaller than its share in the index), they prefer it to do badly — even though they own it.

Rather than trust the quants, Buffett advises those of us who can’t devote our lives to picking stocks to stick with the index. That is an indictment of the huge industry that charges to invest your money.

Nevertheless, there is a profound argument that Buffett is not “investing in the growth of our nation and its businesses,” to use Dimon’s phrase. Instead, he has depended on capitalism’s dirty secret; that success comes not through Schumpeterian creative destruction or competing frantically in innovative new businesses, but by not having to compete at all.

His famous search for companies with a “wide economic moat” is a folksy and charming way to say that he only wants impregnable monopolies. Once satisfied that a business’s defenses cannot be breached, he will buy. “The key to investing,” he once said, “is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

That philosophy is stamped throughout his portfolio. It led to stakes in Coca-Cola, whose brand is insuperable and can survive even a disastrous attempt to change its product; Gillette, which can sell overpriced blades to the captive market of men who have already bought its razors; and the trio of American Express, MasterCard and Visa, who have a chokehold on payments cards. Rather than picking the winner, Buffett saw they were oligopolists safe behind a moat and bought the lot.

The Berkshire version of capitalism pays little heed to benefits for society. Favored sectors include candy (See’s), fast food (Domino’s Pizza and International Dairy Queen), fossil fuels (Chevron and Occidental Petroleum), executive jets (NetJets), and jewelry (Helzberg Diamonds).

Nothing in the Berkshire portfolio has built the kind of transformative products that underpin other massive personal fortunes, like Tesla, Google, Microsoft or Amazon. It’s not even obvious that they help the economy to grow.

True, Buffett’s largest holding is in Apple and he jokes that it has made more money for Berkshire than he has. But that stake dates back only to 2016, almost a decade after the iPhone and its ecosystem were established. It was the biggest company in the US, with a market cap above $500 billion, and has made no breakthroughs to match the Macintosh, iPod or iPhone in the years Berkshire has held it. Buying at that point reflected an (accurate) calculation that Apple had successfully established a monopoly.

Modern capitalists disdain this approach. Moats are “lame,” according to Elon Musk. In 2018, Tesla’s CEO said: “If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation — that is the fundamental determinant of competitiveness.” Musk is now the world’s richest man, of course, but it begins to look as though he needs a moat.

An April Fool’s joke circulated this year that Buffett was buying Tesla for $1 trillion. Asked why he wouldn’t buy Tesla stock, his reply was telling: He didn’t believe it could gain and maintain a dominant position in EVs. The problem was not Tesla’s excessive price, but that it had not extinguished all possibilities of competition.

That call begins to look good. As Buffett shows, a brand makes a great moat, and Tesla’s is seriously damaged. Its speedy innovation isn’t protecting it from lower-priced competitors, led by China’s BYD, which Berkshire holds. Buffett may be right that Musk should have prioritized staving off any potential competition, rather than “the pace of innovation.”

Buffett is no latter-day JP Morgan, whose strategy of merging competitors to form trusts that can dictate prices led to the invention of antitrust. On the few times that Berkshire has made an acquisition in an attempt to find synergies, it hasn’t worked out. He follows all the rules scrupulously; in seven decades as an investor, he barely ever provoked even the slightest allegation of impropriety.

But Buffett does tend to pour capital into companies that antitrust authorities are suing, which are resented rather than admired. While making his investors — who indirectly include many pensioners and charities — much richer, he has contributed to the inequality and lack of competition that has left the American population disenchanted with its economic system. This is not destructive. But neither is it creative.