Any thoughts on this article from 2018 about Buffet and Monopolies?

[scorpioncapital]

I am not sure to disagree or agree. They seem to bring some valid points?

 

https://www.thenation.com/article/archive/special-investigation-the-dirty-secret-behind-warren-buffetts-billions/

[gfp]

It’s one thing to call Verisign a monopoly, but I don’t think anybody intelligent is blaming Warren Buffett for it. 
 

99% of that article is garbage.  Berkshire Hathaway, “valuable tax shelter” LOL

 

Bond rating firms are oligopolies with pricing power. Warren repeatedly pointing that out (as a customer who has no choice but to pay their price) is a public service. It’s not his job to decide if it is allowed in our country or not. At least he understands it well enough to point it out. 

Edited October 4, 2023 by gfp

[ValueArb]

On 10/4/2023 at 12:05 AM, scorpioncapital said:

I am not sure to disagree or agree. They seem to bring some valid points?

 

https://www.thenation.com/article/archive/special-investigation-the-dirty-secret-behind-warren-buffetts-billions/

 

Yea its a bunch of half sourced innuendos and anecdotes. Buffett is clearly not perfect, as he is a human being, but their criticisms are based on complete misunderstandings of what Buffett does and why, and even how investing works. For example, its pretty clear Warren Buffett never bought a share of Verisign, that was such a small position it can only be either a Ted or Todd purchase. 

 

What points resonated with you enough that you felt they were valid?

[ValueArb]

Here is one example of how misguided the article is. It devotes paragraphs to anecdotes about his investments in airlines, consolidation, increases in fees, claims from a single study that fares are higher on consolidated routes and a man who refused to leave a plane when asked. 

 

Yet in 2018, the year this was written, United had its lowest profit margin in four years and its return on equity had declined 5 years straight. American airlines had its lowest operating margin in five years. Both had declining returns on invested capital over previous four years. Not compelling evidence that consolidation was driving higher fares and profitability. 

 

And the author even quotes the most important Buffett quote at the beginning of the airline section, that he would have shot down the Wright Brothers if he knew what industry returns would be.  A better analysis would be to compare profitability and returns on capital for airlines by decade, but the author doesn't have the understanding or critical thinking skills to build that comparison. My guess is that it would show increasing ROC and margins for the mega airlines for the 2010s over previous decades, because that's why Buffett changed his mind upon investing in them. Then the author actually has a supportable (but still weak) case that consolidation is bad for consumers. 

 

The reality is that airlines have to make reasonable profits or they won't stay in business. The counter argument is that historically investors didn't understand the high capital costs and continually gave airlines funding they didn't deserve, and got poor returns for their ignorance. After deregulation in the 1980s investors funded massive growth in airlines and fares plummeted below the cost of capital reinvestment. Those poor returns may have translated into slightly lower prices for consumers, but are unsustainable. A decade like 2010 was inevitable, where pricing finally returned to reasonable levels to support the massive level of capital reinvestment the industry requires.

 

And guess what happened after this piece was written? In 2020-2021 airlines took such massive losses that they nearly wiped out all of the profits from the 2010 decade, and Buffett exited all of his airline positions with his own large losses and hopefully a renewed vow to rejoin air-acholics.

 

This misguided static view of dynamic market economics is echoed in todays DOJ suing to block Jet Blues purchase of Spirit (#6 buying #7, becoming #5) saying "consolidation bad" and that Spirit's ultra low fares will disappear (while seemingly ignoring the fact that Spirit also charges $100 more in fees per ticket than any other airline while cramming customers into the smallest seats of any airline). Spirit has lost $1.5B over the last four years growing its business rapidly by underpricing its fares, how long can it continue to charge those fares? Only as long as shareholders and banks are willing to give it money.

Edited October 20, 2023 by ValueArb

[scorpioncapital]

I think what they were saying is that lack of competition - or strong mono or duopolies protect his ability to earn an economic rent without much headache or risks of high capital investment or expenses. For example, Amazon has over 1 million employees. I'm actually surprised they do so well given that any minor increase in wages would skyrocket their expenses. If they cannot pass it on to customers they would lose volume. Plus you got to pay health insurance, various babysitting tasks etc.. Recently the NDP of BC Canada made very strict bans on Airbnb type housing and the justification was something like, go find another way to get rich or make money. Governments don't like people making tons of money but do not solve the problems by regulation. Usually they need more supply. That's one case. Competition for sure helps. Higher prices leads to more construction for example. That's free market. But then they said they protect the hotel industry. Either way it seems an eternal struggle between protecting party A vs B, or completely monopolizing some area that if was open to competition would result in lower profits for the previous monopolist but spread out among more players and lower prices to consumers. That's the theory. Then there is the argument of inefficiency. I am totally puzzled by it. In theory, competition could be inefficient and even state-run or almost monopolized scale players more efficient. Is the concept of competition somehow defective?? To give credit to BRK they are also in high capex businesses like energy, utilities, railroads. Here they have some monopolies with restricted profits, but steady and high investment needs. With float at 0% they can still earn good leveraged money even at a capped 10% return that's guaranteed. I think the article talks about only those industries that *could* have competition but for some reason the government allowed excessive consolidation and pricing power.

[schin]

On 10/4/2023 at 3:05 AM, scorpioncapital said:

I am not sure to disagree or agree. They seem to bring some valid points?

 

https://www.thenation.com/article/archive/special-investigation-the-dirty-secret-behind-warren-buffetts-billions/

 

We have the benefit of hindsight. If you botch up a monopoly, you must be an idiot, right?

 

The whole Amazon, JPM, and Berkshire conspiracy to dominate healthcare is now disbanded. For kingdom builders, they really lose money in that lock.

Two, the airlines with their oligopoly pricing power really got screwed during the pandemic...so, again, that didn't play out.

 

He references the World Book investment... which were totally eroded by Wikipedia for free. 

 

Again, Warren does like business with pricing power, but there's plenty of examples here of things that didn't lead to his global domination.... 

 

He doesn't look at other "monopolies" that Warren doesn't own like Google in search engines, etc.

[CassiusKing1]

Didn't Warren pass on buying the Ambassador Bridge at one point?

 

Said it didn't feel right to own such an American business artery.

[DooDiligence]

2 hours ago, CassiusKing1 said:

Didn't Warren pass on buying the Ambassador Bridge at one point?

 

Said it didn't feel right to own such an American business artery.

 

 

[CassiusKing1]

Thanks for the link DooDiligence!