(PUB) Investing 2016

15

March 2016

Morningstar FundInvestor

nor do they work harder than did Americans in 1930 . Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.” Looking ahead, even a lackluster 2% real GDP growth rate results in a per-capita growth rate of 1 . 2% , which, over 25 years, “leads to a gain of 34 . 4% in real GDP per capita.... In turn, that 34 . 4% gain will produce a staggering $19 , 000 increase in real GDP per capita for the next generation,” Buffett writes. “Were that to be distributed equally, the gain would be $76 , 000 annually for a family of four.” American innovation and productivity gains are major ingredients in the secret sauce. Buffett points to the history of farming: “Huge increases in physical [crop] output have been accompanied by a dram- atic reduction in the number of farm laborers (‘human input’). Today about three million people work on farms, a tiny 2% of our 158 -million-person work force [versus 40% of the work force in 1900 , by Buffett’s numbers]. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors... We would not have anything close to the America we now know had we stifled those improvements in productivity.” Those endeavors and innovations in turn enable dramatic improvements to quality of life, including advancements in technology, medicine, transpor- tation, and entertainment. “Rockefeller certainly had power and fame,” Buffett observes. “He could not, however, live as well as my neighbors now do.” (When Buffett talks about “his neighbors,” remember that he famously lives in the same Omaha, Nebraska, house that he bought in 1958 .) But such innovation also has a dark side, Buffett notes: “A long-employed worker faces a different equa- tion. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option.”

Berkshire’s own businesses have not been immune. “When low-cost competition drove shoe production to Asia, our once-prosperous Dexter operation folded, putting 1 , 600 employees in a small Maine town out of work,” he recounts. “The same scenario unfolded in slow-motion at our original New England textile operation, which struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke Portuguese and knew little, if any, English. They had no Plan B.” Buffett argues that the solution lies not in curbing the march of productivity, but instead helping those displaced workers. “Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farm- ing,” he argues. “The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces.” Buffett specifically says he would favor a reformed and expanded Earned Income Tax Credit. Near the end of his letter, Buffett adds a darker adden- dum to his generally optimistic outlook. “There is...one clear, present and enduring danger to Berk- shire against which Charlie [Munger, Buffett’s business partner] and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a ‘successful’ (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business.” Buffett further notes that, although the risk of such an event may be small in any given year, small, ever- present risks become much more certain over time to occur at some point. “There is no way for American corporations or their investors to shed this risk,” Buffett writes. “If an event occurs in the U.S. that leads to mass devastation, the value of all equity investments will almost certainly be decimated.” He concluded, “For 240 years it’s been a terrible mis- take to bet against America, and now is no time to start. America’s golden goose of commerce and inno- vation will continue to lay more and larger eggs.” K