In his 2011 Berkshire Hathaway Annual Letter, Warren Buffett explains why he advocates for investing in productive assets like businesses, farms, and real estate that can retain purchasing power during inflation while requiring minimal new capital investment. He highlights companies like Coca-Cola, IBM, and See’s Candy as meeting this criteria.
Buffett believes these investments will outperform non-productive or currency-based assets over time, as their value is determined by their ability to deliver goods and services rather than the medium of exchange. The goal is to increase ownership of high-quality businesses, either entirely or through stocks, as this category of investing is considered the safest long-term winner.
Here’s an excerpt from the letter:
My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.
Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies — think of our regulated utilities, for example — fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more.
Even so, these investments will remain superior to nonproductive or currency-based assets. Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle.
In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce. Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens.
Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot.
Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).
Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.
You can read the entire letter here:
2011 Berkshire Hathaway Annual Letter
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