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A Parralel Universe

Mr. Buffet released his 2017 letter to shareholders last week. The world was once again mesmerized by his astute observations and pearls of wisdom, some of which are reproduced below. To take a couple of samples, readers are reminded that ‘What [leadership teams] need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period—or even to look foolish – is also essential’. Or ‘Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.

But how applicable are these precepts in the real world anyway? Mr. Buffet and Berkshire Hathaway are an anomaly. They are operating in a parallel universe where decision makers have the ability to plan with a long term perspective. Their decision-making power is highly centralized, if not de jure then de facto. Shareholders are happy followers, invited to be entertained at the annual general meeting fair in Omaha where they can eat candies and play bridge. Mr. Buffet has duly earned this status. But it is the privilege of a happy few only.

Seeking to achieve Mr. Buffet’s high standing nowadays is fraught with severe risks. Unlike our benevolent capitalistic autocrat from Berkshire Hathaway, most leadership teams are akin to politicians operating in broad-based democracy composed of a multitude of stakeholders overloaded with information of varying quality. Power tends to be decentralized and often yielded by parties who are not qualified or incentivized to use it wisely. AGMs can turn into ‘a complete waste of time’ as Mr. Dimon declared this week with some exasperation. Politicians suggesting deep cuts in government spending to reduce a country’s leverage and protect future generations have little chance of being democratically elected or re-elected. Similarly, the vast majority of management teams of public-listed companies would run the risk of losing their job if they followed many of Mr. Buffet’s principles. In reference to the aforementioned quotes, who could afford the risk of appearing unimaginative for a sustained period of time whilst being unlevered? To pursue the analogy with politics, shareholder activists are lurking in capitalistic markets as populists do in democracies.

Promoting the value of adopting a longer term perspective when making decisions and lamenting CEOs’ short-termism is facile. Others, such as the Aspen Institute or the Brooking Institution, are seeking solutions to wean the world off short-termism in business and finance. They aim to provide a counter-balance to human being’s carpe diem bias and prevent the system from self-defeating itself. This is where Mr. Buffet’s wisdom would be best applied and most appreciated.

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