Lessons Private Market Investors Can Take From Warren Buffett’s 2019 Investor Letter

The Berkshire Hathaway annual investor letter was recently released. For anyone interested in economics, business, and investing, it’s a must-read – as it has been for past 50-plus years.

While Warren Buffett doesn’t directly comment on the state of the private markets, we thought there were a couple of key highlights that are relevant to the venture capital ecosystem. Berkshire’s 2019 annual meeting will take place on Saturday, May 4. In the past, Buffett has commented on Amazon, initiating a big investment in Apple, and the rise of Artificial Intelligence.

At the upcoming annual meeting, we would be interested in commentary from the Oracle of Omaha around tech stocks, private capital markets, and the outlook for IPOs of large-cap unicorns, such as Uber.

Focus on the Forest – Forget the Trees

“A few of our trees are diseased and unlikely to be around … Many others are destined to grow in size and beauty.” – Buffett highlighting the importance of keeping an eye on the “big picture.”

Buffett recommends that investors should not get bogged down by details of Berkshire’s individual investments in diverse businesses – he refers to them as “economic trees.”

Buffett adds that Berkshire’s investment philosophy has been around finding opportunities within differentiated clusters of businesses – he refers to such company groups as “groves.”

He clearly believes in identifying sectors that benefit from either secular, demographic, cultural or technological trends over the longer term. And, as a next step, he picks a subset of winners in these sectors.

Our Take: Private market investors can follow Buffett’s sector thesis as we believe there are investment opportunities across a variety of sectors which do not have direct investable counterparts in the public markets.

For instance, we believe innovation by private companies in FinTech, mobility, cybersecurity software, and space-tech is likely unmatched by their public market counterparts.

The American Tailwind

“The magical metal [gold] was no match for the American mettle.” – Buffett comparing U.S. corporate profits growth versus value of gold in post-war era.

In his annual letter, Buffett has an interesting section that highlights the resilience and growth of American capitalism.

Buffett provides a series of hypothetical investments to illustrate a simple point: American companies have displayed remarkable resilience and effectively delivered high-quality financial results over the longer term.

He notes that investors might feel anxious at any given period and over the near term, but such periods have turned out to be good entry points for investors with a long-term investment horizon.

Our Take: The venture capital ecosystem in the U.S. remains as vibrant as ever. Since 2009, more than $400 billion in capital has been invested in U.S.-based private tech companies.

VCs and private growth investors continue to sit on record amounts of dry powder to mint more unicorns in the future. Tech companies are staying private longer, and creating more shareholder value in private capital markets. Clearly, the American tailwind is strong and present for the innovation economy, too.

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