In these days when capitalism seems like the cause of all our problems rather than the solution to them, it is more than educational to read the latest letter to Berkshire Hathaway shareholders from Warren Buffett, an old school capitalist who believes that money should be made by adding value — for customers, shareholders, staff and society at large.
As always, Buffett’s letter is full of quotable portions but I was particularly taken by this segment on the Berkshire Hathaway railroad BNSF:
Earlier I explained just how important railroads are to our country’s future. Rail moves 42% of America’s inter-city freight, measured by ton-miles, and BNSF moves more than any other railroad – about 28% of the industry total. A little math will tell you that more than 11% of all inter-city ton-miles of freight in the U.S. is transported by BNSF. Given the shift of population to the West, our share may well inch higher.
All of this adds up to a huge responsibility. We are a major and essential part of the American economy’s circulatory system, obliged to constantly maintain and improve our 23,000 miles of track along with its ancillary bridges, tunnels, engines and cars. In carrying out this job, we must anticipate society’s needs, not merely react to them. Fulfilling our societal obligation, we will regularly spend far more than our depreciation, with this excess amounting to $2 billion in 2011. I’m confident we will earn appropriate returns on our huge incremental investments. Wise regulation and wise investment are two sides of the same coin.
At MidAmerican (Berkshire’s Electricity and Gas generator and retailer), we participate in a similar “social compact.” We are expected to put up ever- increasing sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently, we know that we will obtain a fair return on these investments.
Whatever you might think of big business, if you are a connoisseur of clear and thoughtful communication, with personality and humour, you should read Buffett’s letters to shareholders. They tell a story of America and American business over the last 34 years and they are all to be found here. They are full of good advice, too. Buffett isn’t known as the “sage of Omaha” for nothing:
(On the customers of his successful pre-fabricated and mobile home business, Clayton) Our borrowers recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.
If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.
Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.
But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.