Warren Buffett's changing views on tariffs; Warren Buffett and Charlie Munger on the financial characteristics of businesses they like and the perils of 'cigar butt' investing; America's economy heavily depends on the wealthy

1) Tariffs are on everyone's minds right now... So I was very interested to see that the legendary Warren Buffett's views on them appear to have changed completely over time.

In a recent interview with CBS News, he said "They're an act of war, to some degree." This New York Post article from earlier this week has more details: Warren Buffett breaks silence on Trump's planned tariffs: 'Act of war'. Excerpt:

"Actually, we've had a lot of experience with [tariffs]," Buffett said during an interview with CBS News for a documentary on Katherine Graham, the late Washington Post publisher...

Experts have warned the tariffs could reheat inflation, particularly impacting the automotive industry and sending prices for new cars soaring as much as $12,000.

Buffett, the 94-year-old "Oracle of Omaha," seemed to agree during the CBS News sit-down.

"Over time, they are a tax on goods. I mean, the tooth fairy doesn't pay 'em!" Buffett said with a laugh.

However, two decades ago, he had a very different view...

A hat tip to my friend Marcelo Lima for finding this cover story in Fortune from November 2003: America's Growing Trade Deficit Is Selling the Nation Out From Under Us. Here's A Way to Fix the Problem – And We Need to Do It Now.

Here's a screenshot of the cover:

As Marcelo noted in a thread on social platform X earlier this week, after Buffett outlined the dangers of large trade deficits, "Buffett has a solution. It's called "Import Certificates" ["ICs"], which he admits are indistinguishable from... TARIFFS!"

Here's what Buffett wrote in that Fortune article:

There is no free lunch in the IC plan: It would have certain serious negative consequences for U.S. citizens. Prices of most imported products would increase, and so would the prices of certain competitive products manufactured domestically. The cost of the ICs, either in whole or in part, would therefore typically act as a tax on consumers.

That is a serious drawback. But there would be drawbacks also to the dollar continuing to lose value or to our increasing tariffs on specific products or instituting quotas on them – courses of action that in my opinion offer a smaller chance of success. Above all, the pain of higher prices on goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country's net worth.

I would be very curious to know whether Buffett could agree that his views have reversed... and, if so, why?

One of the reasons I have such respect for Buffett is that he's willing to change his mind – and publicly acknowledge it and share the reasons for it. I suspect we will get the answer at the Berkshire Hathaway (BRK-B) annual meeting on May 3...

2) While I'm on the topic of Buffett and a possible contradiction, another friend, Alex Rubalcava, asked this question at Berkshire's 2003 annual meeting (you can see the seven-minute video here and transcript here):

I have a question about the financial characteristics of the businesses that you like to acquire and invest in.

In your reports and other writings, Mr. Buffett, you state that you like to acquire businesses that can employ a large amount of capital to high returns.

And in reading the writings and speeches of yourself, Mr. Munger, I've seen you say in Outstanding Investor Digest and other publications, that you enjoy investing in companies that require very little capital.

And I was wondering if these statements are at odds, or if they are two sides of the same coin? And if you could elaborate using Berkshire companies, that would be great.

In his answer, Buffett highlighted one of the reasons Berkshire has done so well over time:

The ideal business is one that earns very high returns on capital and could keep using lots of capital at those high returns. I mean that becomes a compounding machine...

But there are very, very, very few businesses like that...

What you've seen is that we've bought businesses, largely, that earn good returns on capital, but in many cases, have limited opportunities to earn anything like the returns they earn on their basic business with incremental capital.

Now, the one good thing about our structure at Berkshire is that we can take those businesses that earn good returns in their business but don't have the opportunity for returns of those similar magnitude on incremental money, and we can move that money around to buy more businesses.

So the magic of Berkshire isn't just that Buffett has been a brilliant investor and capital allocator over time...

He would no doubt have done well running a single business – a retailer, a manufacturer, etc.

But because he's running a diversified conglomerate, he can take cash generated by one of Berkshire's companies, which doesn't have high-return-on-incremental-capital reinvestment opportunities, and allocate it in a completely different area – say, buying Apple (AAPL) stock years ago – that generates fantastic returns.

3) At the other end of the spectrum, at Berkshire's 1998 annual meeting, Buffett was asked about Japanese stocks that were trading below "net-net working capital value," and he talked about the perils of "cigar butt" investing.

Here's the four-minute video: Warren Buffett & Charlie Munger: Cigar-Butt Investing. And here's an excerpt from a transcript with Buffett's response:

It's extremely difficult to get rich by being the owner of a business that earns a low return on equity. You know, we always look at what a business does in terms of what it earns on capital.

We want to be in good businesses. Where you really want to be is in businesses that are going to be good businesses and better businesses 10 years from now. And we want to buy them at a reasonable price.

But many years ago we gave up what I've labeled the "cigar butt" approach to investing, which is where you try and find a really kind of pathetic company, but it sells so cheap that you think there's one good free puff left in it...

I mean, I made money out of that. But A, it doesn’t work with big money anyway, and B, we don't find many cigar butts around that we would be attracted to.

Those are wise words – don't get sucked into the stocks of dying companies because they appear cheap!

4) I read this recent WSJ article with great interest: The U.S. Economy Depends More Than Ever on Rich People...

Not long ago, low- and middle-income Americans were, for the first time in decades, gaining ground economically relative to rich folks. But as the article notes, that has reversed in the past three years. Here's an excerpt:

Many Americans are pinching pennies, exhausted by high prices and stubborn inflation. The well-off are spending with abandon.

The top 10% of earners – households making about $250,000 a year or more – are splurging on everything from vacations to designer handbags, buoyed by big gains in stocks, real estate and other assets.

Those consumers now account for 49.7% of all spending, a record in data going back to 1989, according to an analysis by Moody's Analytics. Three decades ago, they accounted for about 36%.

And as the WSJ article continues, that growth is "unusually reliant" on spending from wealthy Americans:

Mark Zandi, chief economist at Moody's Analytics, estimated that spending by the top 10% alone accounted for almost one-third of gross domestic product.

Between September 2023 and September 2024, the high earners increased their spending by 12%. Spending by working-class and middle-class households, meanwhile, dropped over the same period...

The investing implication here is clear: When investing in any consumer business – retail, fashion, restaurants, travel, etc. – look for ones that are catering to high-income folks...

Best regards,

Whitney

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