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Warren Buffett: ‘America’s Best Days Lie Ahead’

Warren Buffet said in his annual letter to the shareholders of his company, {complink 6408|Berkshire Hathaway Inc.}, that America's “best days lie ahead,” saying in a few words what he has demonstrated in investment decisions over the last few years with acquisitions across a wide range of industries in the US.

While people talk about the “great uncertainty” facing the United States, Buffett insisted that the country still offers many investment opportunities in manufacturing, distribution, retail, and the insurance segment. “Money will always flow toward opportunity,” Buffett said in the letter, “and there is an abundance of that in America.”

It's hard to disagree with a man who has overseen the creation of such huge wealth. Numbers cited by Buffett indicate the book value of Berkshire Hathaway “has grown from $19 to $95,453, a rate of 20.2 percent compounded annually,” in the last 46 years. While that record is important, it's even more significant that investments made in 2010 by Berkshire Hathaway under Buffett and plans for 2011 indicate the US economy will continue to feature prominently in the company's portfolio. No political leader can ask for a greater endorsement than that from a man of Buffett's stature.

In 2010, Berkshire Hathaway had a budget of $6 billion for property and equipment, according to Buffett, and about 90 percent of that was spent in the United States. This year, the company plans to increase its capital expenditure to $8 billion and will “spend all of the $2 billion increase in the United States,” Buffett said.

What makes America stand out is its “human potential,” according to Buffett, who dismissed “widespread pessimism about our economy,” insisting that the country's biggest assets are its people. “The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential — a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War — remains alive and effective.”

The comments from Buffett cheered my soul about America and the rest of the world, even though the 80-year-old chairman of Berkshire Hathaway limited his positive comments to the US. Although not stated explicitly, Buffett was also signaling his view that the global economy has the capacity to overcome whatever is thrown at it this year. First, he noted his company, which owns insurance operations and could face huge payouts in the event of any calamities — natural or otherwise — envisions “a year free of a mega-catastrophe in insurance and possessing a general business climate somewhat better than that of 2010 but weaker than that of 2005 or 2006.”

In our sector, Berkshire Hathaway owns {complink 12888|TTI Inc.}, a leading electronics component distributor, which earned some very strong accolades from Buffett in his letter. TTI, according to Buffett, “had sales 21 percent above its previous high (recorded in 2008) and pre-tax earnings that topped its earlier record by 58 percent. Its sales gains spanned three continents, with North America at 16 percent, Europe at 26 percent, and Asia at 50 percent. The thousands of items TTI distributes are pedestrian, many selling for less than a dollar [but] the magic of TTI’s exceptional performance is created by Paul Andrews, its CEO, and his associates.”

Click here for the full text of Buffett's letter. Here are some key comments from the letter:

  • America's future:
  • Money will always flow toward opportunity, and there is an abundance of that in America. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential — a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War — remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

  • Nightmare in the housing market:
  • 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.

  • Net income manipulation:
  • Regardless of how our businesses might be doing, [we] could — quite legally — cause net income in any given period to be almost any number we would like. We have that flexibility because realized gains or losses on investments go into the net income figure, whereas unrealized gains (and, in most cases, losses) are excluded. We have a deep disgust for “game playing” with numbers, a practice that was rampant throughout corporate America in the 1990s and still persists, though it occurs less frequently and less blatantly than it used to. Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our businesses are doing. Ignore our net income figure, however. Regulations require that we report it to you. But if you find reporters focusing on it, that will speak more to their performance than ours.

  • Debts and borrowers:
  • Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job. Even a short absence of credit can bring a company to its knees.

12 comments on “Warren Buffett: ‘America’s Best Days Lie Ahead’

  1. Taimoor Zubar
    February 28, 2011

    I agree with Warren Buffett's comments about the recovery process. All the points he mentioned sound valid and given the man's experience, it's hard to disagree with him. I particularly like this statement:

    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”

    Considering the root cause of the recent recession, I think it's highly important that the government keeps a check and balance on the housing market. If the housing market is again left unchecked, it's highly likely that a similar crisis may occur again.

  2. Ashu001
    February 28, 2011

    Hi,

    This letter reminds me  of one of those cheerleading squads at the Olympics,which constantly go,”USA,USA…USA,USA…”

    If we agree with what Buffet is saying about Leverage and Debt,then the biggest culprits here are the United.States Govt(through its Gigantic Debt pile) and Buffet himself(through the Derivatives market).

    Its a well known fact that America is printing money on an unseen before scale (and has been increasing money supply for a long-long time).That can directly be correlated in the Wealth factor(seen or unseen across America).

    if we didnt have Money printing on the current scale would Warren Buffet be worth half as much as he is today?[I for one am not sure].Comparing his Wealth vs Gold gives a much clearer and more accurate picture.

    Regards

    Ashish.

  3. DataCrunch
    February 28, 2011

    I would like to agree with the Oracle of Omaha.  I agree that the US produces the most innovations of any other country.  Let’s see if in the future, the US people get to execute on them in getting these innovations to market.  Warren Buffett did bet on the US economy when he made his $5 billion investment into Goldman Sachs during the beginning of the financial crisis.  There were a lot of naysayers at the time, but so far he seems to be having the last laugh.         

  4. Himanshugupta
    February 28, 2011

    Ashish, well noted and balanced reply! Ofcouse Buffet is one of the most prominent investor we have seen in our lifetime but i want to know how much of the total investment of Berkshire Hathway is doing in USA? Maybe in property and equipment, Buffett is planning to invest but what about other sectors. And the property rates in USA are so low right now that they will bounce back.

  5. Backorder
    February 28, 2011

    Whether or not these predictions are justified, One thing is for sure, the oracle knows how to inject a positive sentiment in the market, for the good of his investments!

  6. SunitaT
    February 28, 2011

    Bolaji,

     I agree with your view that “Although not stated explicitly, Buffett was also signaling his view that the global economy has the capacity to overcome whatever is thrown at it this year”. 2010 was pretty good year for stock markets across the globe. Prediction of 2011 being good year for the stock markets are being overshadowed by events happening in Arab world.Lets hope this phase will pass soon and stability returns.

     

  7. Ashu001
    February 28, 2011

    Tirlapur,

    Your hope that stability will soon return to the markets in 2011 makes perfect sense if you consider History-Basically in the 3rd year of a Presidential Cycle ,the stock market almost always rallies.

    The reasoning behind that is not that hard to find.Its because the incumbent Govt. does whatever it can to make sure the electorate looks on them favorably closer to the polls[Even if Markets crash immediately after the elections are over].

    So based on this rationale,2011 should continue to see a decent sized rally in America's stock markets.

    Regards

    Ashish.

  8. elctrnx_lyf
    February 28, 2011

    Thats a very good observation Ashish. I think it is very true that politicians drive the country sometimes and it is businessmen sometimes. Both operate in win-win way most of the times in any capitalist country. As warren said, the economy is going to be positive but at the same time the people are the assets of country. Good news for America from a greatest investor.

  9. Ms. Daisy
    February 28, 2011

    Hi Bolaji:

    Knowing that both the lines of credit/debts in general or derivatives market monies are leverages that are risky or temporary at best, I am interested in suggestions on how we can leverage the other two assets that Wareen buffet mentioned are the strengths the United States –  Investment opportunities and Human potentials

  10. bolaji ojo
    February 28, 2011

    Miss Daisy, The United States derives the strengths identified by Warren Buffett that you focused on — investment opportunities and human potentials — from two key factors. One is the US dollar, which despite current weakness remains the currency of choice for global commerce. No other currency comes close; this becomes even more evident during times of crisis in any regions of the world. The euro was supposed to act as a counterbalance to the predominance of the dollar but it hasn't reached that level yet. As a result, America continues to benefit from inflow and outflow of its money. 

    A lot of times, people concentrate on foreign direct investment (FDI) as a measure of a country's potential as a haven. That's not the case in my opinion. China has been the number one recipient of FDI in the last decade-plus but few would consider the country as the place to “park” their hoards during times of global crisis. That honor is for the US, hence its ability to continue raising billions in loans despite having a huge debt burden.

    The second element you mentioned is the human potentials of the US. Even here, the US towers above every other nation on earth. What makes the US different is not merely the high literacy rate of Americans but also the country's willingness to refresh, renew and reenergize itself with the brightest, smartest and best from all over the world. People continue to troop to the US to be the best they can be and the US welcomes them.

  11. Ms. Daisy
    February 28, 2011

    Thanks Bolaji. Like others who received this good news from the Oracle of Omaha, I am very pleased, but a little concerned about the future too. So please allow me to ask one other question. What is one likely cog in the wheel of the US best days ahead, especially in light of the US mounting debt burden?  .

  12. Anna Young
    March 8, 2011

    Bolaji, this is inspiring. Buffet  rightly said in his assertion that , “money will always flow toward opportunity”.  There is abundance of these opportunities globally. This is why many manufacturing companies flooded China in the first place. I also share strongly in his optimism about what America can still offer.  I agree that global economy has the capacity to overcome whatever is thrown at it. Events in the Middle East cannot completely cripple the world system, its clearly signalling a stare away from complete dependency on crude oil to green or alternative measures – whatever that is.

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