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Warren Buffett is one of the
wealthiest people in the world. He is also Chairman of the Board, President and
Chief Executive Officer of Berkshire Hathaway, a huge US investment
conglomerate. Looking at Berkshire’s investment policy reveals some important
features of the economics of imperialism today and the role of money
capitalists. Buffett’s public image as a kindly old gentleman – the Sage of
Omaha – who favours increasing taxes on the rich and donates to charitable causes,
does not sit well with evidence that he is a predatory gouger of profit. But
these are the times in which we live.[1]
Berkshire’s nondescript name
belies the fact that it is the fifth or sixth largest publicly quoted company
by market capitalisation, at more than $500bn. It owns an extraordinarily wide
range of companies, from insurance and banking, to specialist engineering,
consumer electronics, news media, real estate, energy, railroads and airlines.
Berkshire has more than 240 subsidiaries, but in addition to these it has large
and small equity stakes in many other companies. Some are enterprises that few
have heard of; others are household names. Six big companies account for nearly
70% of its $180bn portfolio of equity holdings: Apple, Coca Cola, Kraft Heinz,
American Express, Bank of America and Wells Fargo bank.
Warren Buffett’s business
strategy has not always been successful. He has made a number of duff
investments, not least an early one in the textiles business that gave his
company its name. Subsequent failures include investments in IBM and Tesco, and
he was quite late into the boom in ‘technology’ stocks, having viewed these
with a traditionalist’s scepticism. But his fund has nevertheless registered
dramatic returns over a long period, well above those that would have been
gained from investing in a broad index of companies. Like some other companies
reviewed on this blog, Berkshire Hathaway does not pay dividends to its
investors, instead relying upon an increasing share price to keep them happy. So far
they have been content: from close to $100,000 in early 2010, the share price
had risen to more than $300,000 by early 2018, to become the most expensive
share in history.[2]
As one might expect, Berkshire
Hathaway uses its financial strength to negotiate deals to its advantage. There are two guiding themes for its investments. Firstly, Berkshire looks for
companies with brand loyalty and potential or actual monopolistic positions
that are likely to keep future profits secure. Secondly, as far as possible, it
wants only to allocate money capital and not to get involved in business
operations.
Monopoly sectors and Berkshire investments
The market power of a monopolist
is a wonderful thing – if you are the monopolist. There is rarely only one
supplier unchallenged by rivals. But being one of very few suppliers, or
having a government contract that guarantees high prices for your product, or
using advertising and brand recognition to cement market domination, or
building a commercial barrier to limit what competitors can do, or using
patents to stall their development, are all means of building a favourable
position in the market. These are the kinds of company, big and small, that
Berkshire Hathaway seeks.
On
the big side is Apple. Although he was late to the party, Buffett started
jumping into Apple’s shares in 2016, after its price had fallen over the
previous year. By late 2017, Berkshire had accumulated more than $20bn in Apple
shares, some 2.5% of the company. The rationale for this investment was that
Apple had an ‘ecosystem’ and level of brand loyalty that meant consumers were
not very sensitive to the exorbitant charges it makes for its products,
particularly the iPhone – as revealed in Apple’s confidence when putting a
premium price on the iPhone X.
Other large companies include
not only the well-known ones like Coca Cola and Kraft Heinz, noted above, but
also those that usually remain out of sight. Take energy distribution, for
example.
Berkshire owns 99% of Berkshire
Hathaway Energy. In addition to its businesses in the US and Canada, this
subsidiary owns two of the fourteen ‘distribution network operators’ in the UK.
Each of these UK operators is a regional monopoly; there are five other holding
companies owning the remaining twelve. Berkshire’s are managed by its Northern
Powergrid company, with operations in Yorkshire and the North East of England.
When people complain about high
costs of gas and electricity, it is usually the energy producing
companies that get the blame, not the distributors. But the latter are often
responsible for something like 25% of a household’s energy bill through the
distribution prices they charge the producers. In 2016-17, Northern Powergrid
(Yorkshire)’s total revenues were £417m and a high proportion of those, nearly
half, were its operating profit of £199m.
Berkshire also invests in many
smaller companies, often those in a strong niche position. Examples are
Precision Castparts (metal components and castings), IMC Group (tungsten
carbide metal cutting tools) and Lubrizol (specialist chemicals). These are an
important component of the holding company’s returns.
Berkshire’s funds come from its direct subsidiaries and from its portfolio of equity investments and
interest bearing securities. Its many investments give a claim on revenues from
all areas of the economy, both nationally (in the US) and internationally.[3]
This is shown by the breakdown of its $25.9bn earnings (profits) before taxes
in 2016. Insurance underwriting brought in $2.1bn, with an additional $4.6bn of
earnings from the portfolio investments of its insurance division. BNSF, its
railroad freight division, brought in $5.7bn, Berkshire Hathaway Energy $3.0bn,
its manufacturing subsidiaries $6.2bn, and the remainder came from a variety of
other businesses and investments.
Being a money capitalist
Many big corporations today do
as little production themselves as they can get away with. Instead they
monopolise design, technology patents and marketing, while the producers of the
goods and services they control become part of their ‘value chains’. Owning
many producing, transport and servicing companies, Berkshire Hathaway would not
seem to be doing this. But it has its own way of working, as spelled out in its
latest annual report:
“operating businesses are managed on an unusually
decentralized basis. There are essentially no
centralized or integrated business functions (such as sales, marketing,
purchasing, legal or human resources) and there is minimal involvement by
Berkshire’s corporate headquarters in the day-to-day business activities of the
operating businesses.”
In other words, Berkshire may
buy out a company and allocate extra capital for investment, but, although it
may choose the Chief Executive of the operating business, the holding company
stays clear of directly managing anything. This shows Berkshire’s role as money
capitalist, even for its operating businesses, quite apart from those companies
in which it just holds a portfolio stake.
The funds for Berkshire’s
investments are mainly held by its insurance division – a large volume of
mostly US dollar-denominated cash, cash equivalents and US Treasury Bills,
which amounted to $71bn at end-2016 (total cash, etc, available was $86bn). A
portion of those funds may be required to meet payments on insurance and
reinsurance policies. More importantly, this is also a store of cash to use
for the opportunistic gouging of other capitalists, especially in times of
crisis when cash is king.
Berkshire has often acted as a
lender of last resort to selected companies in trouble. They are willing to pay
a premium cost for its funds, not only because they have little choice, but
also because backing from a big, well-known investor helps restore some
financial market confidence in their business. In this type of investment,
Berkshire has purchased ‘preference shares’ paying a high fixed rate of
interest and which can only be bought back by the company at a premium, usually
around 10%. As part of these preference shares, the company may also issue
Berkshire long-dated options to buy the company’s stock at very favourable
prices.
Examples of such deals include
Berkshire investing $5bn in the preferred stock of Goldman Sachs back in 2008.
This stock yielded an annual interest rate of 10%. Goldman bought it back in 2011,
but had to pay $5.5bn. Berkshire also gained from the stock options it
received. Similarly, Berkshire bought $5bn of Bank of America’s preference
stock in 2011, although market conditions were not quite so bad and the yield
was 6%. Other companies that have been through this Berkshire process include
General Electric, Dow, Wrigley, Kraft Heinz and Home Capital.
Buffett and the law of value
Berkshire Hathaway’s business is
an example of how a big corporation is often much bigger than you think. Its
fortunes derive from the operation of hundreds of companies it owns directly
and from its myriad of investments that stake a claim on the value produced
worldwide, even though most of Berkshire’s business looks US-based. Its mode of
operation also responds to how the imperialist world economy works today. Do
not just look for a ‘good company’ to invest in, but find the ones with a more
protected niche in the market. Do not just lend to a company with ‘good
prospects’, but wait to pounce on those with a future that are desperate enough
to accept your terms.
Warren Buffett is quite
abstemious and gets a relatively small salary for being the Chairman and CEO of
a major corporation. Nevertheless, he is one of the top 10 richest people on
the planet, with a large income from his personal investments as well as the
wealth represented by his Berkshire holdings. Buffett owns some 18% of
Berkshire Hathaway’s shares and, like some of his plutocrat peers, he has also
organised the company’s shareholdings so that his voting power is higher than
this, at nearly 32% of the total.[4]
He has many fans and receives
the kinds of accolade that would go to a sports team with a great track record.
But this is not a game. It is the world economy, and Buffett’s fund is a prime
example of the power of parasitism today. Berkshire ‘puts money to work’ by
relying upon the work of others, and it siphons off the product of social
labour into the fortunes of private investors.
[1] This review
of Berkshire Hathaway extends the list of corporations covered on this blog.
Earlier ones were: Apple, Alibaba, Amazon, Facebook and Alphabet/Google. I do
not plan to give a comprehensive overview of Berkshire’s operations, for which
see Wikipedia and other Internet sources. Here I want to focus on key points
that illustrate the nature of imperial economics today. Information cited is
mainly from Berkshire’s accounts.
[2] This is the
price of the main Class A shares. See footnote 4 for further details.
[3] When looking
at the details, I was surprised that little of Berkshire’s revenue seems to
come directly from non-US sources. A lot of Buffett’s attention seems to
have been spent scouring the nooks and crannies of the domestic US economy for
profitable openings and to buy into cheapened assets. Berkshire owns stakes in
airlines, regional newspapers, real estate brokerages and automobile
dealerships, among other things.
[4] Berkshire’s
Class A shares are the ones that are priced around $300,000 each. The company
also has Class B shares that are priced around 1,500th of the A shares, but
have only one 10,000th of the voting power. There are 1.65bn Class A shares
authorised and 3.225bn Class B shares.
