In yesterday’s post I said that the Berkshire Hathaway duo disliked crypto because they were heavily bought into the idea that financial regulation is necessary to protect consumers. Regulation reduces competition and increases the prices paid by consumers and the profits of the companies that serve them.
All businessmen hate competition and aim to eliminate it so that they can increase their profits at the expense of consumers. The simplest and most effective way of doing this is to build relationships with government that regulate your competitors out of existence. One hundred years ago the american humorist Will Rogers said,
We have the best congress that money can buy
and things have not got better since then. All businesses demand value for money so if they are spending $30Bn on lobbying Washington you can be sure that their customers are paying for it.
Warren Buffett often refers to “moats” that protect his investment (“castle”).
“But all the time, if you’ve got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it.”
He invests mainly in very large US Businesses (citation required) that have the ability to lobby politicians. These may also be highly regulated and create oligopoly profits. A good example is the BNSF Railway which is the largest of 8 freight railways in the US. It is almost immune to competition because no-one is going to try to build a new railway.
If you are a large business there is not much point in regulating your competitors out of existence if your customers can just buy goods and services from abroad! The best solution to this challenge is to get politicians to tax your overseas competitors goods when they enter the country. You can then put your prices up. If Trump’s trade war becomes the new normal we can expect to see some investors moving into protected industries.
I have no doubt that Mr Buffett is a talented and ethical investor. The best example of this is his investment in Coca Cola. He recognised that Coke’s brand was so strong that it created a moat. In recent years he pursued this theme buy investing in Kraft Heinz but this has not been so successful. What changed?
Software is Eating the World – Marc Andreessen
The internet, social media and now crypto, blockchain and AI are changing the world by increasing competition. The Kraft Heinz deal went sour because new brands can quickly grow using social media and use information technology to quickly respond to changes in demand (see Marketing Services). We will soon see crypto increasing competition in other highly regulated industries such as insurance. CRYPTOSTAR.MONEY lists hundreds of crypto investment funds.
Warren Buffet is wrong about crypto and blockchain because he does not recognise its potential to reduce increase competition and reduce corporate profits. As Upton Sinclair said,
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”