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“a girl in a convertible is worth five in the phone book.”

By March 2, 2011No Comments

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.