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Wednesday 1 October 2014

Thomas Molloy: What Warren would do to change Ireland

From avoiding tech firms to being positive, Warren Buffett has much to teach us, writes Thomas Molloy

Published 19/01/2014 | 02:30

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PAPER PROPHET: Warren Buffett has not invested in the firm of Bill Gates. Photo: Getty

AN entire cottage industry exists to answer the question "What would Warren do?" The Warren in question is legendary investor Warren Buffett who has become the second richest man in the world thanks to a seemingly simple investment strategy.

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Those investment principles have inspired dozens of guides, imitators and even a children's book. Thousands travel to Omaha, Nebraska, each year to hear him muse about investing and the economy as a whole.

As our country still grapples with the after-effects of the financial crisis, one that Buffett largely predicted with his description of some derivatives as "weapons of mass financial destruction", perhaps we should ask ourselves what would Warren Buffett do?

We've taken the Troika's medicine with mixed results but what would we have to do if we decided to take Buffett's medicine instead?

The legendary investor has left us with plenty of advice in the form of the annual letter that he writes to shareholders. As well as the advice in those letters, we can judge him by his actions. Over the years, Buffett has invested in hundreds of companies and made his clients millionaires and himself one of the richest men in history.

So what would the man often called the Sage of Omaha do if he were reforming or investing in Ireland? Here are 10 things he'd probably try based on his beliefs and actions over the past seven decades of investing.

1 Introduce a fair tax system that makes the rich pay their share: Buffett might be a billionaire but he complained recently that he pays a lower rate of tax than his secretary and said this needs to be changed. Here in Ireland we have the same sort of tax avoidance schemes that pepper the US tax code and allow many of our wealthiest citizens to pay tax at a much lower rate than the rest of us. Buffett doesn't like special tax measures because they distort decision-making. That's why we have hotels and houses in the wrong places.

2 Stay away from technology companies: This might be the most controversial advice of all and unpopular with the IDA. Buffett's success comes from avoiding companies that he doesn't understand. He has not invested in the likes of Intel or Microsoft for decades despite his friendship with Bill Gates. "It's probably unfortunate. I don't know what that world will look like in 10 years, and I don't want to play in a game where the other guy has an advantage over me," he said in the late Nineties. At the time it seemed quaint. When the tech bubble burst two years later, it seemed like genius.

3 Avoid inefficient charities: This country is one of the most generous donors to third-world countries but we don't always give that money in an efficient way, handing hundreds of millions to organisations with questionable governance. When Buffett decided it was time to donate much of his $44bn fortune, he gave most of his money to the Bill & Melinda Gates Foundation, a charity set up by the Microsoft founder and his wife. "I'm a big guy on outsourcing," Buffett said at the time.

4 Stop trusting the financial services industry: The Government here constantly relies on bankers, stockbrokers and management consultants for advice. Buffett is much more cautious. "Our recommendation in respect to the use of advisers remains: 'Don't ask the barber whether you need a haircut'." In other words, stop asking for advice from people who will make money from advising a certain course of action.

5 Invest in railways. Buffett's single biggest purchase was a $39bn investment in a railway company. Buffett likes these sort of investments because they produce income streams that are easy to predict. On the other hand, Buffett does not like power utilities so he would probably sell off Bord Gais and the ESB.

6 Punish the bankers who destroyed the country: Buffett wrote in 2010 that "the chief executives and directors of the failed companies have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behaviour of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price -- one not reimbursable by the companies they've damaged nor by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."

7 Hire successful people: Public life is full of people who desperately need fat pay cheques from the State and top-ups as well. Buffett believes it is better to hire people for top jobs who have already made their fortune. "They are volunteers, not mercenaries. Because no one can offer them a job they would enjoy more, they can't be lured away," he wrote in 2011.

8 Stop massaging the debt figures: The Government goes to great lengths to hide the true scale of the national debt with accounting tricks such as Nama. Buffett does the opposite, doing everything he can to make it easy to read the balance sheets of his companies. He refuses to invest in companies that indulge in "game-playing" with numbers, a practice that was rampant throughout corporate America in the Nineties.

9 Cash is king: Buffett's investment company Berkshire Hathaway customarily keeps at least $20bn (€14.7bn) on hand so that it can withstand unprecedented insurance losses or quickly seize acquisition or investment opportunities, even during times of financial turmoil. That's just a little less than this country has in cash right now.

10 Be optimistic: While it is easy to feel gloomy, Buffett continues to believe the best is yet to come. "The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted," he has written. "We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead." It would be no harm if we believed the same thing here!

Irish Independent

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