Warren Buffett's Bet Against Innovation

Posted by: Bruce Nussbaum on November 4, 2009

The U.S. is in deeper trouble than I thought, if Warren Buffett is right. In proclaiming an “all-in wager on the economic future of the United States, Buffett just paid $44 billion for a 19th century technology platform, a railroad, that carries 20th century goods—coal, agriculture, imports from Asia, petroleum. This is a vision of an America mired in the past and in economic and political decline.

And Buffett just might be right. He has a great track record betting against innovation. His company, Berkshire Hathaway, is famous for investing in insurance companies and utilities, and avoiding high tech and innovative corporations. Its stock is up 84% over the past decade, while the S&P 500 is down by 18%.

I’m hoping that Buffett’s vision of the future is wrong. I’m hoping that a US economy based on making, not consuming, green, not carbon-centric, based on digital not metal network platforms, will drive economic growth and prosperity. I’m betting on innovation.

The purchase of the Burlington Northern Santa Fe railroad may have one benefit lost on Buffett. A 19th century network platform that is a railroad may have new life in an energy-conscious 21st century economy. Railroads, as we all know, are among the most energy-efficient modes of mass transportation for goods and people. Updating that platform, making it even faster and cheaper, could help propel the U.S. into a very different kind of future than the one envisioned by Buffett. That would be a future where railroads shipped exports of innovation new products and capital goods that reduced carbon energy.

Reader Comments

LukeG

November 4, 2009 6:58 PM

Interesting perspective, but shouldn't commercial railroads thrive if the US can develop a successful green/cleantech manufacturing industry? Software and digital networks will definitely help manage and guide steel, but someone has to actually make the solar panels and wind mills and fuel cells and batteries.

Hopefully we can play a role in powering the rest of the world for a change.

Sam Rhodes

November 5, 2009 3:24 AM

Indeed that future is not only possible, but probable. Railroads will be revived - at least those which were not dug up with the thought that they were extinct.

Brandon W.

November 5, 2009 4:24 AM

The railroad may be a 19th-Century concept, but it is far cheaper and more efficient in every way to haul that much freight at once. It saves fuel, it saves time, and it just works better.

tom h.

November 5, 2009 6:02 AM

Mike Mandel makes an identical -- and equally suspect -- argument. Buffet invests only in what he knows, and that does not not include high tech. Moreover, until you can find a way to efficiently move physical commodities through fiber optic cable, then you'll need rail and trucks.

Homer Pairs

November 5, 2009 6:17 AM

This does not go quite far enough. BN&SF is estimated to carry coal to fuel 10% of US electric generation, which would represent about 20% of US coal shipments. Hard to think of a more regressive business to buy into. Unless you believe in the clean coal fairy

Michael Lippitz

November 5, 2009 4:31 PM

You're probably right about Buffett's vision for the future of rail transport, but maybe not. The energy efficiency element you cite could be part of a future in which business is done differently, and in which the old technology of railroads play a significant role.

I believe that large companies are going to have to play a significant role in making innovation real, particularly in the CleanTech area. For instance, start-ups are not going to reach the President’s goal of “doubling the nation’s supply of renewable energy in the next three years.” I hope you are correct that we are heading for "a very different kind of future than the one envisioned by Buffett."

The bottom line is that innovation is not necessarily just about new technology and small companies. This has been the focus of research that my colleague and I from the Kellogg School of Management have been doing over the past six years. For more on our work, see www.growfromwithinbook.com

Dan Lewis

November 5, 2009 7:58 PM

So, is Buffet stupid or smart -- in four paragraphs you seem to go from one to the other. I doubt if any benefits were lost in his decision to invest $44 billion. I love my iPhone but it's not going to deliver fruit to the Northeast in January.

Daniel Christadoss

November 7, 2009 2:17 AM

Like Warren Buffet we have ESSAR of India.
Essar has probably never invested in R&D directly. They built their fortune on Steel mills, Power plants, Cells Phones, Shipping and have now bought iron ore mines in Minnesota. I believe there are those that build wealth on existing proven technology and those that gamble on innovation. The VC's of silicon valley are there for the innovators. So, we don,t have to worry. America is not in trouble as we think

Daniel Christadoss

November 9, 2009 4:30 AM

The comments make very interesting reading. I believe the key to making America an economic powerhouse is really very simple. We expect too much from our leaders who are not Supermen but more like each one of us. Each one of us should have a goal to improve our immediate area. For example we should have a goal to reduce our energy consumption by 10% and increase our productivity by 10% for 2010. This should be from a grass roots level. We should probably take a cue from "Imagining India, a book by Nandan M. Nilekani" Ideas for any books on "Imagining America" :-) and go DFSS (Design for Six Sigma)/Design Thinking mode

craig

November 9, 2009 3:33 PM

Bits will not replace atoms Bruce. And I don't believe for a nanosecond that the value of energy-efficient transportation platforms was lost on Buffet or almost anyone else who follows supply chains.

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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