by David Robertson, CFA, CEO, Areté Asset Management
Warren Buffett’s view of the glory days as part of the much-awaited letter to shareholders. It provided a typical mix of transparent reporting of business results, dollops of investment wisdom, and occasional witticisms. As usual, it also offered a hearty tribute to entrepreneurialism in the US.
Many of the stories are inspirational reminders of the success that can accrue to hard-working souls in the land of opportunity. However, it is increasingly difficult to square the letter’s optimistic tone with the harsher reality many people face today. Buffett’s letter also smacks of Bruce Springsteen’s less favorable characterization of “trying to recapture a little of the … glory days”.
To be sure, investors read Buffett’s letters because they are informative and insightful for all kinds of investors. Unlike many corporate communications, Buffett does not provide any short-term financial guidance. Instead, he offers general updates to the businesses and includes competitive positioning, strategic advantage, and economic opportunity. As such, the letters are real-time case studies in business analysis by one of the industry’s best.
Another hallmark of Buffett letters is salesmanship. While he rarely misses an opportunity to talk up his businesses’ quality, he is also a diehard fan of the US’s economic landscape. As he describes:
“Since our country’s birth, individuals with an idea, ambition and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving the customer’s experience with something old.”
Boasting that “Success stories abound throughout America,” Buffett regales readers of several such examples. The stories of See’s Candy, GEICO, National Indemnity, Nebraska Furniture Mart, Clayton Homes, and Pilot Travel Center are all inspirational and plenty enough to get the juices flowing of any would-be entrepreneur.
As wondrous as the stories are, though, there is a character about them that seems not wholly of this world. For one, the stories are old. The companies were founded, respectively, in 1921, 1936, 1940, 1936, 1956, and 1958. In other words, the most recent started over fifty years ago. As a result, the anecdotes come across more as snippets of nostalgia, like sepia-toned photos at a grandparent’s house, than unusually insightful windows into today’s landscape for new business creation.
Similarly, Buffett’s stories don’t feature any technology. Only two of his origin stories predate transformational developments in transistors and semiconductors in the middle of the twentieth century. Given that all five of the largest S&P 500 are tech companies, this is a significant omission. It also makes Buffett’s sample set glaringly unrepresentative of today’s economy since the global economy and the US have become more dependent on knowledge and information.
The set is also unrepresentative in that it fails to capture any meaningful innovation. As the economy has evolved over the years, services have become much more important than goods. Simultaneously, knowledge and information have become more important than tangible things like commodities and manufactured items. As a result, today’s would-be entrepreneurs’ more interesting universe involves innovation and being at the cutting edge of change, not at the commoditized and outdated end.
While there have been plenty of entrepreneurial opportunities in business technology, communications, biotech, alternative energy, and many other areas, there are also new perils. Industry concentration has continued apace, which pits newcomers against increasingly powerful incumbents.
“The protective behavior of such companies, [in the form of acquiring competitors or driving them out of business] has become so transparent as to be labeled the ‘kill zone,'” – The Economist
The net result is an opportunity set for entrepreneurs that is much smaller than it otherwise would be.
As the Economist also reported:
“America’s tech giants have gobbled up competitors and spent lavishly on political donations and lobbying. There is no guarantee that superstars, having achieved dominance, will defend it through innovation and investment rather than anti-competitive behaviour. And even if large platform firms are perfectly efficient, economically speaking, Americans might worry about their influence over communities, social norms and politics.”
Another factor that clouds the skies for would-be entrepreneurs is low population growth. As Jeremy Grantham articulated in the Financial Times:
“We are in a global baby bust of unprecedented proportions … The worldwide fertility rate has already dropped more than 50 percent in the past 50 years, from 5.1 births per woman in 1964 to 2.4 in 2018, according to the World Bank. In 2020, the 20 percent shortfall below replacement rate in US fertility, together with low net immigration, produced the lowest population growth on record of 0.35 percent, below even the flu pandemic of 1918.”
One of the more powerful tailwinds for growth over the years has been healthy population growth. But now, growth is hovering just above zero. Further, as Grantham explains, “Lower population growth directly causes slower economic growth.” As a result, new businesses will not benefit from sustained organic growth to create demand (short-term debt-funded stimulus aside). Instead, growth will have to come by taking a share from incumbents.
Also, many of the challenges for startups got exacerbated by the pandemic. Restrictions on travel and personal contact created massive headwinds for new businesses trying to get off the ground. Safety protocols increased costs for young companies with low margins. Erratic and inconsistent public policy has been difficult for small businesses to navigate. Further, it often favored large public companies or older companies with established business relationships when help did come.
Finally, a sustained period of economic instability has constrained the population of aspiring entrepreneurs. As Jean M. Twenge describes in her book, iGen, the generation of people born between 1992 and 2012 (aka Gen Z) is well aware of the limited potential for economic success. According to Twenge, iGen is very practical, especially relative to millennials, and is willing to take a job they don’t like to secure a regular paycheck. Economic security ranks as a high priority for them, and as a result, they have much lower expectations for work than those of millennials.
A Different Century
All of this paints a very different picture of entrepreneurial opportunity in the US than the one Buffett describes. To a significant extent, this is a shame because Buffett does provide valuable insights. Indeed, an idea, some hard work, and a little capital can go a long, long way with a determined individual. It is also true that such ideas don’t always have to be complicated; they can include a new creation, but they can also involve simply improving the customer’s experience with something old. These lessons are timeless.
However, the stories Buffett selects also reflect a time, an age, and an economy, which are highly different from today. Partly this speaks to a country that has grown older, as has much of the rest of the world. But it also speaks to public policy that has repeatedly and persistently borrowed from the future. From unaffordable pension plans to excessive debt levels to often erratic and capricious policymaking to regulatory capture by corporations, public policy has slowly but inexorably unleveled the playing field for entrepreneurs.
To a significant extent, one can forgive Buffett for gravitating to business examples from many years ago. We all tend to place disproportionate weight on experiences from more formative years. At 90 years old, those were quite some time ago for Buffett.
To another extent, however, Buffett can be criticized for his selection of entrepreneurial highlights. By drawing exclusively on companies that were founded many decades in the past, he glosses over the many business landscape changes since. In doing so, he does today’s aspiring entrepreneurs something of a disservice by being less than entirely forthright about the contemporary risk/reward calculus for starting a new business. Further, if the message is not relevant, not only will his valuable insights be missed, but they may even come across as just boring stories of glory days.
David Robertson CFA is the CEO of Areté Asset Management and founded Areté with the mission of helping people to get the most out of their investing activities. Most of his career has focused on researching stocks and markets, valuing securities, and managing portfolios for mutual funds, institutional accounts, and individuals. He has a BA in math from Grinnell College and a Masters of Management from the Kellogg School of Management at Northwestern University. Follow Dave on LinkedIn and Twitter.