Don’t Buff it up

The Economist notes how Buffett’s investment strategy has changed:

But there is another problem with Mr Buffett: his fondness for oligopolies. After being disappointed by returns from textiles in the 1960s and 1970s, and then by shoe manufacturing and airlines, he concluded his firm should invest in “franchises” that are protected from competition, not in mere “businesses”. In the 1980s and 1990s he bet on dominant global brands such as Gillette and Coca-Cola (as well as Omaha’s biggest furniture store, with two-thirds of the market). Today Berkshire spans micro-monopolies such as a caravan firm and a prison-guard uniform maker, and large businesses with oligopolistic positions such as utilities, railways and consumer goods.

As more money has followed his example, America’s economy has become Buffettised. Among investors there is a powerful orthodoxy that you must own stable, focused businesses with high returns and market shares and low investment needs. Managers have obliged. Of America’s top 900 industries, two-thirds have become more concentrated since the mid-1990s. Last year S&P 500 firms reinvested only 45% of the cashflow they generated. Protecting margins and cutting costs is the priority. Economic growth suffers as a result.

Emphasis.  Not a criticism of Buffet – he’s just seeking the best returns – but a good indication that the market many not be as efficient as many believe.