What, Me Worry?


In my younger years, I enjoyed the irreverent humor of “Mad Magazine” with its fictitious mascot, Alfred E. Neuman.  I’m not saying that Warren Buffett resembles the goofy Mr. Neuman in any physical sense, but Neuman’s catch-phrase, “What, me worry?” comes to mind as Mr. Buffett has made some news with the recent release of his annual letter to Berkshire Hathaway shareholders.

Full disclosure:  I own a few shares of Berkshire Hathaway.  A very few shares.  Just enough to brag that Warren and I are business partners (sorta) but not enough for me to retire any time soon.  In fact, although Berkshire has been a high performing stock in my personal portfolio, my Berkshire holding is so small that if I sold it today, it wouldn’t even buy me a new car.   Just for fun, consider the following exercise in wishful thinking:  I purchased my small Berkshire stake back in 2002.  If my parents had invested the same amount (adjusted for inflation) in Berkshire stock in my name back in 1965 (when I was one year old), you would be reading the words of a guy sitting on a nearly $7 million stake in Warren’s enterprise today.  If only…

Needless to say, I have a great deal of admiration and respect for the Oracle of Omaha.  Still, I am a bit perplexed by his recent discussion of climate change in his annual shareholder letter.  In general, it seems clear that Mr. Buffett prefers to err on the side of caution by assuming that the threat of climate change is real.  The letter refers to major commitments that BH Energy has made “to the future development of renewables in support of the Paris Climate Change Conference.”  With respect to a proxy proposal that will come before shareholders this year, Mr. Buffett waffles a bit.  He does say that he believes it is “highly likely” that “climate change poses a major problem for the planet.”  But then Mr. Buffett proceeds to explain that he considers the unknown consequences of climate change to be so potentially catastrophic that even if the chances of the consequences coming to fruition is only 1% it merits a “highly likely” conclusion in order to invoke action before it’s too late.

In the wake of that murky reasoning, Buffett proceeds to downplay the proxy proposal (which would require the company to issue a report on the dangers that climate change poses to BH’s insurance business) by suggesting that there is no evidence of increased losses due to climate change, and that if increased losses should materialize it would actually be good for the insurance business.  The basis of Buffett’s argument is that any increased loss costs year-to-year, are matched with increased premiums year-to-year, because most insurance policies are written with one year terms.  He further justifies this reasoning by pointing out that if GEICO’s loss costs per policy had remained at their $30 per policy levels of 1951, the company would be only a $600 million firm rather than the $23 billion firm that it is today.  The implication is that rising loss costs will drive revenues up as well, thereby creating growth.  Buffett concludes this section of his letter warning that homeowners in low-lying areas may want to consider relocating to avoid the consequences of climate change, but “when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

In fact, Mr. Buffett seems to be a climate change believer who fears cataclysmic, Biblical outcomes are possible, if not “highly likely” unless we act to quell climate change now.  But don’t worry… if there are more storms and more losses from climate change in the future, Berkshire Hathaway (and other major insurers) will somehow benefit from as opposed to being threatened by climate change.  Perhaps I am too simple-minded to properly understand these seemingly contradictory perspectives on climate change, after all, Mr. Buffett does have billions to his name, and I almost had $7 million, if only…

Oh well.  What, me worry?




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