…and solve the problem with our economy at the same time.
Warren Buffett has been successful for any number of reasons, few of which have anything to do with his ‘aw shucks’ demeanor.
- Information Advantage — He has a world class network of information and deal sourcing.
- Low Cost of Capital/Free Float — He figured out a long time ago that the returns from investing his excess capital in equities vs. bonds would provide ‘free float’.
- (Virtually) Unlimited Capital — With the cash in the bank, free cash flow from the GEICO and other business, and bankers dying to lend him money, he has a war chest of available capital rivaled by few.
The elements of his strategy he has been clear about and benefit him/Berkshire shareholders tremendously, are:
- Long Term Horizon/Patience — While this sounds trite, it is clearly the antithesis of Wall St. and positions him to be opportunistic…at times like these.
- Faith In Capitalism — This should not be overlooked.
- Ability To Move Quickly/Decisively
ECONOMIC ARBITRAGE
Warren Buffett has applied the simple laws of economics and compounding:
- Source low cost capital
- Invest at a higher return
- Align the duration of assets (investments) with liabilities (demands on sourced capital)
When done over long periods of time, it works, as long as you have an unshakable faith in capitalism.
HOW GOVT.’S CAN INVEST LIKE BUFFETT
Governments around the world have a historically low cost of capital. Their borrowing costs are almost (and in some cases actually) non-existent.
Governments are taking unprecedented steps to mobilize $’s to support small businesses and individuals impacted by the sudden stoppage of business activity due to social distancing.
The New Business Preservation Act
There is actually legislation being introduced by Senators Amy Klobuchar (D-MN), Angus King (I-ME), Chris Coon (D-DE) and Tim Kaine (D-VA) to mobilize Federal dollars for just such a strategy — targeting those communities largely overlooked by the existing venture industry.
A ‘Fund of Funds’ strategy, where the Federal Govt. (along with State & Local Govts) invest the proceeds from a specific debt offering, allocating capital in pools that than are allocated into sequentially smaller/localized funds, which can then deploy capital into their local startup ecosystems efficiently, via:
- Standardized fund structures
- Low Fees
- Standardized term sheets & dollars available to each startups — as long as they have achieved standardized, de-risking milestones.
- Each startup term sheet qualifies for the Qualified Small Business Stock (QSBS) tax incentive, which de-risks investments from the local angel/venture investors.
The venture model is largely unchanged since it was first established in 1959, following the Small Business Investment Company Act of 1958. Per Tom Nicholas, Professor of Entrepreneurship at Harvard Business School, who wrote of this very fact in his recent book — that may be the consummate work on venture capital — ‘VC-An American History’;
The fact that partners’ talent matters most is an important finding, and is consistent with the fact that the VC industry has been remarkably devoid of organizational innovation since Draper Gaither and Anderson was founded as a limited partnership in 1959. pg 311.
With the unprecedented times and Monetary and Fiscal Policy actions, it is time to think outside the box in how we support our ‘economic immune system’ — the entrepreneur.
