At the end of February Warren Buffett published his much-awaited letter to shareholders which provided a typical mix of transparent reporting of business results, dollops of investment wisdom, and occasional witticisms. As usual, it also provided a hearty tribute to entrepreneurialism in the US.
While many of the stories are inspirational reminders of the success that can accrue to hard working souls in the land of opportunity, it is increasingly difficult to square the optimistic tone of the letter with the harsher reality many people face today. In an important sense, then, Buffett's letter also smacks of Bruce Springsteen's less optimistic characterization of "trying to recapture a little of the ... glory days".
To be sure, Buffett's letters are widely read because they are informative and insightful for all kinds of investors. Unlike many corporate communications, Buffett does not provide any short-term financial guidance. Instead, he provides general updates to the businesses but also includes assessments of competitive positioning, strategic advantage, and economic opportunity. As such, the letters are real-time case studies in business analysis by one of the industry's best.
Another hallmark of Buffett letters is salesmanship. While he rarely misses an opportunity to talk up the quality of his businesses, he is also a diehard fan of the economic landscape in the US and the many opportunities it presents. As he describes:
"Since our country’s birth, individuals with an idea, ambition and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving the customer’s experience with something old."
As wondrous as the stories are, though, there is a character about them that seems not wholly of this world. For one, the stories are old. The companies were founded, respectively, in 1921, 1936, 1940, 1936, 1956, and 1958. In other words, the most recent one was started over fifty years ago. As a result, the anecdotes come across more as snippets of nostalgia, like sepia-toned photos at a grandparent's house, than unusually insightful windows into today's landscape for new business creation.
Similarly, Buffett's stories don't feature any technology. In fact, all but two of his origin stories predate transformational developments in transistors and semiconductors in the middle of the twentieth century. Given that all five of the largest companies in the S&P 500 are tech companies, this is a meaningful omission. It also makes Buffett's sample set glaringly unrepresentative of today's economy since the global economy, and that of the US, has become more dependent on knowledge and information.
The set is also unrepresentative in that it fails to capture any meaningful innovation. As the economy has evolved over the years, services have become much more important than goods. At the same time, knowledge and information have become more important than tangible things like commodities and manufactured items. As a result, the more interesting universe for today's would-be entrepreneurs involves innovation and being at the cutting edge of change, not at the commoditized and outdated end.
While there have been plenty of entrepreneurial opportunities in business technology, communications, biotech, alternative energy, and many other areas, there are also new perils as well. Industry concentration has continued apace which pits newcomers against increasingly powerful incumbents. "The protective behavior of such companies, [in the form of acquiring competitors or driving them out of business] has become so transparent as to be labeled the 'kill zone'," as the Economist reported. The net result is an opportunity set for entrepreneurs that is much smaller than it otherwise would be. As the Economist also reported:
"America’s tech giants have gobbled up competitors and spent lavishly on political donations and lobbying. There is no guarantee that superstars, having achieved dominance, will defend it through innovation and investment rather than anti-competitive behaviour. And even if large platform firms are perfectly efficient, economically speaking, Americans might worry about their influence over communities, social norms and politics."
“We are in a global baby bust of unprecedented proportions … The worldwide fertility rate has already dropped more than 50 per cent in the past 50 years, from 5.1 births per woman in 1964 to 2.4 in 2018, according to the World Bank. In 2020, the 20 per cent shortfall below replacement rate in US fertility, together with low net immigration, produced the lowest population growth on record of 0.35 per cent, below even the flu pandemic of 1918.”
In addition, many of the challenges for startups were exacerbated by the pandemic. Restrictions on travel and personal contact created massive headwinds for new businesses trying to get off the ground. Safety protocols increased costs for young companies with low margins. Erratic and inconsistent public policy has been difficult for small businesses to navigate. Further, when help did come, it often favored large public companies or older companies with established business relationships.
Finally, a sustained period of economic instability has constrained the population of aspiring entrepreneurs. As Jean M. Twenge describes in her book, iGen, the generation of people born between 1992 and 2012 (aka Gen Z) is well aware of the limited potential for economic success. According to Twenge, iGen is very practical, especially relative to millennials, and is willing to take a job they don't like in order to secure a regular paycheck. Economic security ranks as a high priority for them and as a result they have much lower expectations for work than those of millennials.
All of this paints a very different picture of entrepreneurial opportunity in the US than the one Buffett describes. To an important extent this is a shame because Buffett does provide useful insights. It is true that an idea, some hard work, and a little capital can go a long, long way with a determined individual. It is also true that such ideas don't always have to be complicated; they can include a new creation, but they can also involve simply improving the customer’s experience with something old. These lessons are timeless.
The stories Buffett selects, however, also reflect a time, an age, and an economy, which are extremely different from todays. Partly this speaks to a country that has grown older, as has much of the rest of the world. But it also speaks to public policy that has repeatedly and persistently borrowed from the future. From unaffordable pension plans to excessive levels of debt to often erratic and capricious policy making to regulatory capture by corporations, public policy has slowly but inexorably unleveled the playing field for entrepreneurs.
To an important extent Buffett can be forgiven for gravitating to business examples from many years ago. We all have a tendency to place disproportionate weight on experiences from more formative years. At 90 years old, those were quite some time ago for Buffett.
To another extent, however, Buffett can be criticized for his selection of entrepreneurial highlights. By drawing exclusively on companies that were founded many decades in the past, he glosses over the many changes in the business landscape since. In doing so, he does today’s aspiring entrepreneurs something of a disservice by being less than completely forthright about the contemporary risk/reward calculus for starting a new business. Further, if the message is not relevant, not only will his useful insights be missed, but they may even come across as just boring stories of glory days.