IN THE ETHER

A global archive of independent reviews of everything happening from the beginning of the millennium


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June 2019


Three decades ago I used to have friends whose families owned media. These days I am much more unassuming, if it ever paid to assume anything!

Buffett is an investor who goes for companies with monopoly or near monopoly market power, especially American ones. His forays into British companies, e.g. Tesco, have not been particularly successful. (The review to the right was written in 2001).

In British private media, except for newspapers, you cannot get close to monopoly power which does not mean media is not very important to the politically ambitious.

Ken Livingstone then Nigel Farage having had connections with LBC has been useful to them. Boris Johnson being star columnist of the Daily Telegraph is currently invaluable to him.

Sky News has changed control recently. Owning a media property does not mean you use it as a battering ram but it does mean someone else is excluded from doing so.

Television properties have been the bedrock of Silvio Berlusconi's long persisting political power.

With an indifferent internet property like Pinterest still commanding an immense valuation in the markets, a property like itv with its disguised potential to be a political counterweight to the BBC, as Sky News used to be, marks it out as undervalued. It would be small change for a large internet company.

Social media companies can be a real pain to use, forever foisting their ever-changing rules on the user. Legacy television companies still command greater neutral trust and a wide audience.

Genuine monopolists should steer clear though. The BBC is the monopolist brand and as long as its quality holds up most will settle for that.








CAN BRITONS EMULATE BUFFETT?


By ANDRE BEAUMONT


Recently, 71-year old Warren Buffett, the world's most successful investor, also known as the Sage of Omaha, was reported in Business Week magazine to have warned investors to expect another eight years of economic gloom to follow the boom years of the 1990s.

Yet as Peter Lynch, author of Beating the Street, has written, Buffett above all buys into "great businesses when they are having a temporary problem or when the stock market declines and creates bargain prices for outstanding franchises".

By this reckoning, Buffett's septuagenarian years will be full of plentiful opportunity. He will use them to buy cheap assets that will assure his investment company, Berkshire Hathaway's, stellar returns on capital continue long after he has ceased managing the company. As Lynch says: "One does not have to be correct very many times in a lifetime as Warren states that twelve investment decisions in his forty year career have made all the difference".

So if we are entering the locust years - which, in investment terms, will be years of opportunity for the long-term investor - could you emulate the Sage of Omaha?

No name stirs up more fantasy in the minds of private investors than that of Warren Buffett. In good times, he sounds so easy to emulate - an apparent strategy of long term buy and hold leading to a 20-25% annual compound return on capital.

Don't be fooled by this mirage. Such a compound return is unlikely to have been achieved by many investors in Britain over a decade let alone a period exceeding 30 years.

Don't let the name of Warren Buffett lead you to dream. 171,000% appreciation over 34 years is definitely not possible in the U.K.! For all his genius, 71-year old Buffett from Nebraska could never have been a sage hailing from Britain. Here's why.

· Almost exclusively, Berkshire Hathaway, invests in companies that have the U.S. as their home market. The American economy has grown much more strongly than that of the U.K. in every decade over the past 40 years. For good overall returns you need a vigorous economy and a briskly growing market. Will the British economy really grow at a compound rate of, say, 5% over the next decade with a possible slowdown already on the way?

· Typically, Berkshire Hathaway's holdings have been in companies like Coca-Cola, Gillette, American Express and Walt Disney, with strong brands and consumer franchises but which have first dominated their home market, America, before going on to conquer the world. If you dominate the world's largest market, this provides you with a much more defensible base from which to launch forth than from a market healthily open to competition but with no great economies of scale like that of Britain.

· Unlike American companies, virtually no British companies have been able to deliver largely consistent returns over decades, so the pool of conclusively healthy companies in which large stakes might be taken by a would be Berkshire is much reduced. Glaxo SmithKline, Tesco, Six Continents, Lloyds TSB, HSBC, Unilever and Guinness make up the bulk, in terms of capitalisation, of this very small host.

· British management changes frequently at the top and this is an indication that it may still be generally deficient, as the top managers must have come from somewhere. Heads rolling at the top always precede the most thorough nail banging in the coffin of a long term buy and hold policy. New chief executives are often inclined, or need, to change the whole direction of companies. So investors need, in turn, to frequently re-evaluate the wisdom of holding a particular share. If you bought GEC for Weinstock's emphasis on positive cashflow, can you really now hold onto it as Marconi with its tumbling profits and high debt?

· Berkshire Hathaway owns 100% of many of its investments allowing it to control their future. Its other investments often constitute sizeable percentages of companies, accompanied by a board seat, allowing it to influence companies' long-term future and discourage value destroying acquisitions. British investment culture rarely results in a board seat for large institutional investors.

· At the heart of Berkshire Hathaway's success lies 100% ownership of large insurance companies like GEICO, National Indemnity and General Re. In insurance, premiums largely balance claims but the premiums are available for investment before claims arise. This means that Buffett has large amounts of capital, known in the insurance industry as float, to invest on behalf of its insurance companies. Since Berkshire owns 100% of the companies anyway this money can be invested more as if it were Berkshire's capital, following Buffett's investment criteria. It is an elegant form of low risk gearing with all the benefits flowing to Berkshire. When Berkshire bought General Re in 1998, it brought $24bn of investments to a company capitalised at $56bn to manage. For British insurance companies, Buffett's lifelong emphasis on concentrating investments in a few holdings would be considered inappropriate.

If Buffett continues to deliver his historically high rates of return to Berkshire's shareholders, it will not be through means available to investors based in Britain and investing mainly here.

Despite Buffett's utterances that he would like to invest more in Britain and Europe, this will not come about to any great extent. This side of the pond may not fall within his fabled 'circle of competence' - his term for what he understands thoroughly - and everything suggests he knows his returns would not be as high.

His only long-term investment here was in Allied Domecq and a relatively small one for Buffett at that. This was sold last month. He appears to have taken the stake because Berkshire once owned shares in its competitor, Guinness, and so, exceptionally fell within his 'circle of competence'. Berkshire's 3.15% stake was worth around $190m.

Buffett will not leave his American heartland. The opportunities to acquire cheap assets there in the downturn are too many.

Other than by investing in Berkshire Hathaway itself, the chances of you matching its performance in the next eight years are slim.