Warren Buffett, the Oracle of Omaha and Masa Son, the goofy venture capitalist heading SoftBank, may appear to be polar opposites, but under the surface, they have much in common.
In the past week, two large investment holding companies and conglomerates reported their financial results for the second quarter. One was based in Omaha, Nebraska, and makes careful investments – only at the right price – in traditional, stable, cash-generating businesses with deep economic moats. The other is headquartered in Tokyo, Japan, and quickly plows billions of dollars into young high-tech companies that have yet to turn a profit.
The references are, of course, to Berkshire Hathaway (NYSE: BRK.A) and SoftBank Group (OTC: SOFTBY), which reported quarterly profits of $14 billion and $10.6 billion, respectively. Not only are their vast investment portfolios a Venn diagram that barely overlaps (Apple will invest in SoftBank’s Vision Fund 2 and Berkshire has a $40 billion stake in Apple), but the personae of the two founders, Warren Buffett and Masayoshi Son, couldn’t be more different.
Buffett hoards cash for decades, waiting for overheated public markets to correct and then snaps up industrials with strong brands at cheap valuations. Berkshire holds insurance companies, public utilities, a carpet-maker, and a company best known for making cheese and ketchup.
Masa raises dizzying amounts of capital in a very short period of time – famously, Mohammad bin Salman, the crown prince of Saudi Arabia, committed $45 billion to Masa’s first Vision Fund after a 45-minute meeting – and commits it almost as quickly. SoftBank Group said that as of June 30, 68 percent of the first Vision Fund’s $100 billion had been invested, just two years after the fund’s launch.
Buffett likes industrials and Masa likes artificial intelligence, but both CEOs have made large, successful bets on transportation companies, and a useful comparison might be drawn by looking at those investments.
In November 2009, as the United States was starting to emerge from the depths of the Great Recession, Berkshire Hathaway acquired the remaining 77.4 percent of the Burlington Northern Santa Fe (BNSF) railroad it did not already own for $26 billion in cash and stock, valuing the company at $34 billion. Including Berkshire’s prior investment and BNSF’s debt, the deal was worth $44 billion. BNSF itself was the product of a merger between the Burlington Northern and the Atchison, Topeka, and Sante Fe railroads in 1994, but the roots of those two companies went back to the 1850s when the first transcontinental projects were authorized.
BNSF is the quintessential old transportation company – capital-intensive, it owns 32,500 miles of trackage and more than 8,000 locomotives, employing 44,000 people. It’s even closely tied to the old energy economy – of all of the Class 1 railroads, it hauls the most coal as a percentage of its total carloads (17.1 percent according to this week’s volume data). BNSF also enjoys that deeply established, hard-to-disrupt business that Buffett prefers – the rail’s permanent infrastructure connects America’s heartland to the bustling West Coast ports at Los Angeles, Long Beach, Oakland and Seattle. Half of BNSF’s volume is comprised of intermodal containers.
The railroad has done very well for Buffett – it threw off $1.33 billion in profit in the second quarter, about 22 percent of Berkshire Hathaway’s earnings from operating companies (i.e., excluding its earnings from equity investments). If BNSF was valued similarly to its western rail peer Union Pacific, the company today would be worth $105 billion. BNSF’s revenues have grown and its operations have gradually become more efficient, though it’s unlikely that Buffett, who values company culture and employees, would fully commit to precision scheduled railroading.
Masa, on the other hand, has invested in 21st century technology, not 19th century infrastructure. In December 2017, the SoftBank Vision Fund bought a 15 percent stake in Uber for $.72 billion at a discounted valuation of $48 billion; those shares were owned by Uber employees and previous investors. As part of the same deal, SoftBank injected $1.25 billion of new capital at Uber’s then-current valuation of $70 billion.
Uber Technologies (NYSE: UBER), founded in 2009, uses a mobile app to help people hail rides from a crowd-sourced fleet of drivers, match trucks to freight, and get food delivered fast. One can think of Uber as a massive, high-tech, asset-light brokerage of transportation for people, things and food. The company has expanded rapidly in geography and mode – offerings include helicopter rides to JFK airport, sushi delivered on foot in Tokyo, truckload transportation in Germany, ferry rides in the Niger River delta and cheap car rides in more than 700 cities around the globe.
About four million people drive for Uber, creating a flexible, on-demand network of transportation capacity that is the very antithesis of BNSF’s vast real estate holdings and steel rails.
There’s another big difference between BNSF and Uber – Uber didn’t make $1.33 billion in quarterly profits; instead it recorded a $1 billion loss in the first quarter of 2019. The company is still aggressively investing in its growth. Uber grew its ridesharing gross bookings by 34 percent year-over-year and its food delivery gross bookings by 41 percent year-over-year in the first quarter.
According to Barron’s, so far SoftBank’s Uber investment has generated a 27 percent return, and the company has investments in 81 other tech firms. Across SoftBank’s Vision Fund portfolio, Masa said he’s generating a 40 percent internal rate of return. That led to a year-over-year tripling of SoftBank’s profits in the second quarter, which was the best quarter for any Japanese company since 2004.
Yet despite the obvious differences, there are more similarities between Buffett and Masa than first meet the eye. Both investors have firm conviction in specific macro theses; both investors have exceptionally long time horizons for their positions; and both prefer taking large, passive stakes in companies.
A short-hand for Buffett’s macro thesis is “The American Tailwind,” the title of a section of his 2018 letter to shareholders. Simply put, through a combination of historical accident, which combined a particular culture of entrepreneurialism with vast natural resources, America’s long-term economic growth has lifted all boats.
“Charlie [Munger] and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind,” Buffer wrote. “It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’”
Buffett continues to make large bets on The American Tailwind while eschewing global companies and technologies he does not fully understand. In fact, at the time of the BNSF acquisition, he said “it’s an all-in wager on the economic future of the United States.” It was the largest deal Berkshire had ever executed.
Meanwhile, when asked about his investment thesis, Masa likes to cite ‘the singularity,’ the (hypothetical) point in the future when artificial intelligence (AI) will exceed human intelligence and transform civilization in dramatic, unpredictable ways. Although SoftBank Vision Fund invests in companies as diverse as Uber, Slack, WeWork and Flexport, Masa says that his entire investment strategy is oriented around AI. In the Uber deal, it’s a bet on pricing and matching algorithms and the future development of autonomous vehicle technology.
Warren Buffet, who is 88 years old, has a famously long memory and investment time horizon. He still rues the money he wasted buying a failing textile mill in the 1960s; 45 years later he was still calculating the lost compounded interest he would have earned had he invested the money in an index fund. Fundamentally, Buffett buys businesses that are not going away any time soon.
Buffett’s guidance is far-seeing – “There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back,” he wrote in the 2018 shareholder letter.
Masa’s futuristic vision is not as rooted in the past as Buffett, but has an even longer time horizon, memorably expressed in his own eccentric way. SoftBank’s companies, Masa said, are like the stars in the Milky Way and “will continue shining for 300 years.”
Both investors are burdened with finding large deals capable of moving the needle on huge portfolios. Masa calls it his “core number one strategy,” saying that SoftBank is uniquely positioned to make big bets on late-stage startups. He finds the leader in a space and feeds it so much cash it dominates its competition. Buffett is also looking for large deals. He has repeatedly said that he is hunting for an “elephant-sized acquisition,” and struggling to find a target at a reasonable price.
Finally, both Buffett and Masa tend to leave management alone. They aren’t activists and they don’t try to transform the operations of their companies like a private equity firm might. Masa calls his startup entrepreneurs “Jedis.” When Buffett bought BNSF in 2009, Matt Rose had been the chief executive officer since 2002, and he continued to serve in that role until 2013 and in the executive chairman role until his retirement in December 2018. Buffett and Masa invest in executive teams as much as they invest in business models and ideas.
Buffett and Masa still have plenty of pieces to move on the chessboard. Berkshire Hathaway has swelled its cash hoard to $122 billion, the most in company history. Meanwhile, Masa announced that SoftBank’s Vision Fund 2 has secured $108 billion in funding and could start investing as early as next month. Warren Buffett and Masa Son are old men now, but both investors still have transformative deals ahead of them. The whole world is watching.