WARREN BUFFETT: cash and debt

Berkshire Hathaway has 73 different kinds of businesses. Basically, the management looks for a business that has a durable competitive advantage not only today, but 10 to 20 years from now.

A wonderful business is like having an economic castle. People would want to come and take over the castle. People will try everything to imitate. It’s capitalism.

Capitalism is all about coming and trying to take the castle. A great business needs a castle with a durable advantage – a moat.

Berkshire Hathaway has 73 different kinds of businesses. The management looks for a business that has a durable competitive advantage not only today, but 10 to 20 years from now.

A GOOD BUSINESS NEEDS A CASTLE

A wonderful business is like having an economic castle. People would want to come and take over the castle. People will try everything to imitate. For a famous restaurant, it could be the menu. Imitators could copy it or attempt to make something better. It could be the parking. One of the things customers hate are places with few parking slots. Imitators could get a wide lot allotted for the parking area. It could also be the chefs. The imitators could pirate the chef by offering a bigger salary or better benefits. There are many others. It’s capitalism.

Capitalism is all about coming and trying to take the castle. A great business needs a castle with a durable advantage – a moat. That moat can be represented by various kinds depending on the type of business. It could be a low cost producer, good talents, an appealing offer, and many more. Only the sky is the limit.

For example, a boxing champion like Manny Pacquiao keeps knocking out opponents. He has a competitive advantage as long as he does it. A great motion picture like what Steven Spielberg creates has an economic value. What Berkshire is really looking for is institutionalization. They want an institution that regardless of the person in charge, they’d maintain that competitive advantage over the decade. They hope to find that in some businesses and they try to get the best person to run it.

Even in decision-making, Buffett makes mistakes. According to him, it wouldn’t be fun without mistakes.

CLAIM CHECKS, PORTRAITS, AND PYRAMIDS

Money is a claim check on the output of others in the future. Buffett has a pile of dollar bills, bonds, gift checks; name them. Those are all claim checks. Anyone can use claim checks to exchange for the goods and services produced.

Buffett can hire thousands of people every day and paint a portrait him. His claim checks will be used to pay all those painters. Buffett can spend all his time looking at the portraits deciding which one is the best.

Buffett can hire the best architects and engineers to build wonderful pyramids. Those pyramids can be the next attraction – replacing the ancient pyramids in Egypt. Why should people go to Egypt to see pyramids when Buffett can use all his claim checks to construct better ones?

The portraits and the pyramids are just illustrations of what claim checks can do. Money commands services to other people. Money makes change and can be exchanged as well. Anyone can exchange that piece of paper for goods and services of other people in the future. The wisdom in this depends on the individual. Some people build pyramids, and some people engage in cancer research.

WHAT TO DO WITH ALL THE CLAIM CHECKS

Buffett’s family got everything they need for the last 50 years, but also 50 years ago, he and his wife decided that beyond taking care of themselves, there is no reason to settle for the next 25 years. They can use their claim checks so their kids won’t have to do anything to contribute to the society. One way or another, the money was going to go back to society. The question is who would be best at using those claim checks. There are 6 billion people in the world, so Buffett founded foundations where they can allocate the claim checks to.

THE WHAT IFS

Generally, the government keeps the GDP relatively within a range. Nobody wants debt! Nobody wants the GDP to climb at 2000% If the American workers were told by a politician 20 years from now that when he works 40 hours and an hour and a half of that, every week is going simply to service the debts incurred by the previous generation, because they over consumed. He would say, “I’m not interested in doing that anymore.”

An extreme example is back at the time of the revolution. If someone offered to say, “This fight is not worth it. Lot of people will get killed. Why don’t we just make a deal with you? We want our independence. Why don’t we just give you 3% of our output forever and you give us freedom?” Things would have been better that way.

However, 3% a year of output during the revolution weren’t produced that much yet anyway. The first generation is a fair deal – 3% royalty to the English. The United States would’ve obtained freedom and nobody would have been killed. The next generation might settle with this, but it wouldn’t work now. If America were giving 3% of its output to England for the freedom many years ago, something would happen – another war. It’s much easier to inflate the way out of it.

WARREN BUCKS AND THE YEARS TO FOLLOW

Buffett could finance all his consumption today by handing out something called Warren Bucks if he wanted to. Also, if he had the power to determine the value of those IOUs overtime, he’d make sure when he repays them 10 or 20 years from now, they were worth less per unit than they are today. A country that piles up external debt will have a great temptation in flight overtime. That means the currency of America is likely to depreciate overtime. All currencies, actually.

In terms of how to benefit the society, the taxes has favored the rich enormously. Buffett is not treated as an endangered species, but the government wants to make sure nothing bad happens to him. What that, he gets a tax rate of 15% counting payroll taxes on their very large income. The average American is paying a higher tax rate than Buffett. It’s a bad thing that taxes are going very much. It wasn’t this way 50 years ago. Even though the low end is going far better than people were on the high end, the people on the high end are doing this a hundred years ago. There are many things that a person earning a normal wage in this country can do and enjoy this. A rising tide has lifted the boats, but it has lifted the odds a lot faster.