“It’s easy to look back over the 115-year span and realise how extraordinarily beneficial agricultural innovations have been — not just for farmers but, more broadly, for our entire society. We would not have anything close to the America we now know had we stifled those improvements in productivity. (It was fortunate that horses couldn’t vote.)” - Warren Buffett

The Berkshire Hathaway’s annual shareholder letter has always been a special event for this writer as I continue to be a devout follower of Warren Buffett. No summary can really do justice to his insights and witty writing, so I would urge you to take some time and read the originals, if you have not done so already. The letters can be found here in their entirety: http://www.berkshirehathaway.com/letters/letters.html

Below are some highlighted thoughts that I found particularly entertaining and interesting with some of my own commentary.

Making America great again?

As usual, Warren is bullish on America and its prospects:

“It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

“That view is dead wrong: The babies being born in America today are the luckiest crop in history.

“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honoured and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.”

Henry Kissinger once said: “You can’t sit on the lid of progress or you’ll get blown to pieces”. I would agree with his sentiments. If one takes the long view it has never been advantageous to bet against human ingenuity and progress. If you listen to the politicians, however, you would think the US is spiralling into the abyss.

Additionally they suggest only they can fix what ills the US has. This of course is a load of propaganda which is perpetuated by an unfortunate wave of demagoguery. Technology is advancing rapidly with cutting-edge cures for diseases and amazing new products. Unemployment is low, the US is still growing and maintains its leadership position in many industries globally. That doesn’t mean things are perfect and there are not some major issues but it is ridiculous to think America has an apocalyptic failure.

Productivity and prosperity

The most thought-provoking section of this year’s Berkshire report has to do with productivity. As discussed numerous times before, a country needs workers in order to grow, however, it is not rich simply because it has workers. As a simple example take Peru and New Zealand. Both economies have a similar GDP but Peru’s population is nearly seven times that of New Zealand.

For a country to be wealthy and enjoy a higher standard of living it must be productive. Productivity essentially measures how good you are at taking your land, labour and capital and turning them into valuable products. According to Buffett, there are, however, potentially negative side effects:

“To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: both capital and labour can pay a terrible price when innovation or new efficiencies upend their worlds.”

You probably can’t go a week without reading about some of the incredible advancements being made in robotics and big data analytics. Watson, the IBM super-computer robot, now wanders the halls with doctors in some hospitals. We are now entering a different era. One which Erik Brynjolfsson and Andrew McAfee from MIT coined The Second Machine Age where: “It is a global transformation in which computers and other digital advances are doing for mental power — the ability to use our brains to understand and shape our environments — what the steam engine and its descendants did for muscle power.”

They suggest there is a very real risk of economic disruption as computers and associated automation get increasingly more complex and powerful. As a result, companies will have less and less need for workers and technological progress and innovation will leave behind large swathes of people. Larry Fink, the chief executive officer of BlackRock, even went on record suggesting that the trend in technology will lead to global unrest as the developing world must now grapple with jobs being lost to technology.

My biggest takeaway from this year’s letter was this warning. Looking to the future it seems clear that the new middle and upper classes will consist of tech-savvy workers. If you want to do good for the future generations make sure your children and grandchildren know how to program and use technology for more than Snapchat and Tinder so that future productivity improvements benefit them rather than harm them.

Warren also warns against trying to stop progress and suggest we may need to start developing programmes to help those who cannot adapt to this rapid shift upon us:

“The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favour a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever-increasing prosperity for the great majority of Americans should not be penury for the unfortunate.”

Very wise words. The solution will never be protectionist policies and/or a withdrawal from competition. It will need to involve embracing change and the fostering of the industries involved in this change. If a country does not foster and attract the disruptors than it will simply be disrupted. If one is concerned in any way about the shifting sands of employment, one will need to think longer term on where they want to be and what they can offer in the new world.

America has always done an exceptional job of “owning” the disruptors in many areas thus the industries it has destroyed have been replaced with new ones. Small undiversified economies, however, face huge risks without exposure to innovative sectors. As Warren mentions:

“A long-employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option.”

Countries need to make sure their workers have options and the skills necessary for the future.

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisors prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.