Buffett: net as chain letter

[Doug Henwood]

Financial Times - May 1, 2000   

Buffett warns against e-hype
By Andrew Edgecliffe-Johnson in Omaha

The internet will create no more wealth than a chain letter and will 
damage the profits of most US businesses, Warren Buffett said this 
weekend.

Addressing 15,000 shareholders at the annual meeting of Berkshire 
Hathaway, America's wealthiest investor, said: "For society the 
internet's a wonderful thing, but for capitalists it's probably a net 
negative.''

Mr Buffett's aversion to investing in technology stocks contributed 
to the investment and insurance group's worst ever absolute and 
relative returns in 1999. He was unrepentant on Saturday, saying: 
"When we look back, we will see this as a period of enormous amounts 
of wealth transfer [rather than wealth creation].''

The internet was much more likely to reduce the value of American 
business than improve it, he said, because the ability to easily 
compare prices online would drive down margins and increase 
competition.

Internet investments worked on the same principle as a chain letter, 
he argued: "If you are very early in a chain letter, you can make 
money, but there's no money created."

Mr Buffett, who has chaired the Omaha-based group for 35 years, 
likened current equity market conditions to the "mania" in farmland 
prices in Nebraska 20 years ago, noting: "It killed a lot of people 
who bought at those [inflated] prices.''

He added: "Any time there have been real bursts of speculation in the 
market, it does get corrected eventually.''

Asked about the decisions of two other prominent investors - George 
Soros and Julian Robertson - to scale back or close their hedge 
funds, Mr Buffett said he was not in the same business.

However, he gave strong indications that Berkshire may reduce its 
equity holdings. It would prefer to expand its list of wholly-owned 
operating companies through large acquisitions, rather than put more 
money into stock market investments, he said.

"I'd love it if we could move all the money we have in securities 
into businesses we like," he added: "But that's not going to happen 
in all probability, because it's too tough to find businesses that we 
like."

The legendary loyalty of Berkshire Hathaway's investors, some of whom 
had travelled from Australia and Japan, appeared unshaken by the 
group's poor performance last year, which is still 25 per cent below 
its peak despite a recent rally.

Only two of the shareholders who addressed the six-hour meeting 
referred to the stock. One, Steve Yates from Chicago, thanked the 
people who sold Berkshire stock last year "for giving us an 
opportunity to buy more of the world's greatest stock."

Another jokingly chided Mr Buffett and his vice chairman, Charlie 
Munger, saying he would like to give them "10 lashes with a wet 
noodle because you have spoiled your shareholders into expecting 25 
per cent [annual growth in Berkshire's book value]".

Last year, Berkshire's book value advanced just 0.5 per cent, while 
the S&P 500 recorded a 21 per cent gain.