Warren Buffett isn’t convinced the tech industry can continue to grow – and perhaps we shouldn’t be, either

When Warren Buffett says something, even investors who do not agree with him sit up and listen. So the Oracle of Omaha’s annual letter to shareholders ranks only behind his annual meeting of Berkshire Hathaway as a moment to ponder about the next directions of the world of assets. And this weekend’s letter is particularly interesting for two reasons: he has had a bad year; and he is finding it hard to discover real value in most shares.

The bad year is summed up in two numbers: 11 per cent and 31.5 per cent. The first is the increase in the per-share market value of Berkshire Hathaway stock. The second is the rise in the S&P 500 index with dividends included. On a long view, since 1965, he has beaten the index, with a compounded annual gain of more than 20 per cent, vis-a-vis one of 10 per cent for the S&P. That is why he remains, at the age of 90, a hero for many small (and now not-so-small) investors. But 2019 was not good.

There are two ways of looking at this. One is to say that he missed out by not realising how important the tech boom was to the US economy. Tech titans Microsoft, Apple, Google, Facebook and so on dominate the world in their various segments. He did not see this – or rather did not see it sufficiently early, for one of his largest holdings is Apple, so he does have a stake in there. The other way of looking at it is to say that on a long view the valuations of these high-tech companies are far too high. Yes, they are wonderful, but they are over-priced.

That leads to the second point: is everything overpriced?

His response is to say that while equities will over the long term produce better results than bonds and that they are happy with their major holdings, they are having trouble finding new areas to invest in. Berkshire Hathaway had a cash pile of $128bn at the end of last year sitting around waiting to be placed.

That is a bearish signal. Charlie Munger, vice-chair of Berkshire Hathaway and long-time partner of Warren Buffett, was explicit about this. Speaking earlier this month he said he saw “lots of troubles coming” as there was “too much wretched excess”.

He added that he felt the pace of innovation was slowing and that his generation (he is 96) had had the best of technological change.

This is interesting because it is surprising. We can all see the argument that if governments print reams of money and hold interest rates to near zero, you are going to get a boom in asset prices. The money has to go somewhere. There is inevitably the sense of excess he notes. But slowing technological gains? That is not a mainstream view. If anything, it is the opposite.

What is worth saying is that conventional measurements of productivity do suggest that it has been hard to achieve the same pace of technical advance in service industries that have been achieved in manufacturing. That applies in the US as much as elsewhere in the developed world. But it is counterintuitive to think that the online revolution, with everything from Airbnb to Google to Uber, online food and goods delivery services and so on, have not dramatically increased the efficiency of service industries. Look at the job losses in the banks, or the switch to card and contactless payments – American Express is one of Berkshire Hathaway’s largest holdings. Surely the financial service industry is achieving huge increases in productivity?

But whatever one’s view of Warren Buffett and Charlie Munger, what they do is to encapsulate huge global investment puzzles in a few choice words. Over the years they have been more right than wrong, and the big message from that cash pile is that markets are overly frothy right now.