Why Warren Buffet doesn't invest in startups

[Money & Finance]

Here is a short paragraph from Berkshire’s 1993 letter:

“In many industries, of course, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?”

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“Severe change and exceptional returns usually don't mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today's business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.

Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns. “

 

1987 letter to Berkshire Hathaway shareholders

Warren Buffet understands value investments and is exceptional at it. Also, value investments deal with hundreds of millions of dollars, and return hundreds of millions as well. These amounts make a difference to Buffet. 

For a big investor like Buffet, a seed investment of $1 Mn which returns $5 Mn is nothing more than pocket change.

Berkshire generates $20-25bi per year in cash. Hard to invest this amount of money in startups.

 

 

[Mic Drop]

The 91-year-old investing legend pushed his “buy and hold” investing strategy before thousands of finance nerds at Berkshire Hathaway’s annual shareholders meeting this weekend.

It’s worked out pretty well this year. Berkshire Hathaway, a conglomerate with investments across corporate America, is up 10% so far in 2022, compared to the S&P’s 13% drop-off.

And Buffett’s buying the dip

Berkshire scooped up $51.1 billion of US stocks during the market sell-off in Q1. Of course, Buffett would never call it “buying the dip” because he doesn’t believe in timing the market. Speaking of timing, Buffett said he and his BFF Charlie Munger “haven’t the faintest idea what the stock market is gonna do when it opens on Monday.”

So what did he buy?

• He’s certainly bullish on the energy sector. In Q1, Berkshire acquired a big stake in Occidental Petroleum and juiced its stake in Chevron (which is now the company’s fourth-largest holding).
• And…video games? It’s unlikely that Buffett has ever touched an Xbox controller, but Berkshire Hathaway is now the largest shareholder of Activision Blizzard after amassing a 9.5% stake. Activision stock has jumped more than 15% after Microsoft agreed to acquire it in January.

Buffett said the influx of new traders buying and selling stocks during the pandemic has turned the market into “almost totally a casino” in which large American companies have become “poker chips.” Munger lashed out at the trading app Robinhood specifically for promoting the gambling dynamic. Citing Robinhood stock’s 86% plunge from its peak, the 98 year old said, “God is getting just.”

Buffett also chimed in on the state of the US economy, most notably the inflation that’s soared to 40-year highs. Buffett said that inflation “swindles almost everybody” and was a result of the Fed’s gargantuan stimulus measures to prop up the economy during the pandemic. But he still thinks the Fed did the right thing: “In my book, Jay Powell is a hero. It’s very simple. He did what he had to do.”