Warren Buffett Doesn’t Like Spending on Streetcars (but Has No Problem With Crazy Highway Spending)
Warren Buffet. (Source: Wikimedia Commons/USA International Trade Administration.)
If there is one thing we can probably all agree is true about Warren Buffett it is that he is good at investing. The Oracle of Omaha, as he is affectionately referred to in finance circles, has a long track record of financial success. When Buffett gives investment advice, people pay attention.
Buffett’s core investment approach has three basic principles. First, invest within your circle of competence. You should be able to intuit when things aren’t right, and that only comes by knowing the field you’re deploying your money in. Second, think like a business owner when making an investment. Don’t fall in love with a company or a story about the industry, but instead dig into the numbers and ask difficult questions about cash flow, return on equity, profit margins, and the like. Finally, buy a company only when it is cheap. This discipline provides a margin of error for those many times when you are wrong, especially when wrong about the timing.
I’m personally rather ambivalent about Buffett and his investment advice. I tend to subscribe to the Nassim Taleb school of investment, which, up front, recognizes that success is a combination of wisdom and good fortune (aka luck), with perhaps greater emphasis on the latter. As Malcolm Gladwell wrote in his astounding New Yorker essay about Taleb called “Blowing Up”:
Warren Buffett was known as the "sage of Omaha" because it seemed incontrovertible that if you started with nothing and ended up with billions then you had to be smarter than everyone else: Buffett was successful for a reason. Yet how could you know, Taleb wondered, whether that reason was responsible for someone’s success, or simply a rationalization invented after the fact?
Smart people often make a lot of money. Smart people also frequently lose astounding amounts of money. If you believe that intelligence and insight is the key ingredient to financial success, you’re only examining the winners. Buffett is one of the most successful investors of our time, but does that make him particularly insightful on investment matters? Perhaps, but there are reasons to believe his own circle of competence doesn’t include public investments.
Buffett’s home city of Omaha, Nebraska, is in the process of making billions of dollars of transportation investments, almost all of them ill-conceived and guaranteed to rob the community of resources. Back in 2017, I wrote about the Omaha-Council Bluffs Metropolitan Planning Agency’s absurd plan to build $7.6 billion in transportation infrastructure when their projected revenue was just $3.9 billion.
One slide from the MAPA presentation on funding for their plans. (Click to enlarge.)
Considering someone whose second core principle is to “think like a business owner when making an investment,” this plan should have drawn Buffett’s ire. Has anyone involved with MAPA, the USDOT, the Federal Highway Administration, or the cities of Omaha or Council Bluffs ever done a return-on-investment calculation for this spending and asked “how much private investment do we need to make this public investment cash flow?” No, they haven’t.
In fact, they have not even looked back at the investments they have already made to see if those investments paid off. Anyone who tries to apply the mindset of a business owner to the billions of dollars of transportation investments made in the Omaha region would be appalled at the absence of all financial seriousness.
Anyone asking why there is such a massive funding gap, or whether the funding gap has anything to do with a poor return on prior public investments, would be met with looks of confusion or even hostility. These are not polite questions in such settings.
And anyone who suggests these investments not be made would be laughed out of the room. That’s because public spending on transportation isn’t about investing. It’s not about spending a dollar and getting multiple dollars in return. From a financial perspective, it’s pure consumption. From a social and political perspective, we would call it welfare or, maybe if we’re being generous, a transfer payment.
All of this makes it strange that Buffett, who has remained silent on these billions of dollars of negative-returning investments, recently chose to voice his opposition to a downtown streetcar project, one where the financials (while not great) look better than any other Omaha transportation investment on offer.
In a letter to the editor of the Omaha World-Tribune, the 92-year-old Buffett acknowledged that it “can be off-putting” for him to be telling Omaha residents “what is good for their future.” Even so, he makes an exception for the streetcar project, which he says will be “hugely expensive” and “have very limited utility.” Buffett calls on the leadership of Omaha to put the matter to a public vote and states that, if given the opportunity, he will vote “no.”
The points Buffett makes about the streetcar’s operations and utility are debatable. What one party sees as an inflexible gamble “literally cast in cement” another will see as the long-term commitment necessary to attract significant private investment. (Note: the project is contractually tied to the development of a skyscraper in downtown Omaha.) This kind of large, top-down investment is not the bread and butter of a Strong Towns approach and I’m not here to defend it, but neither are the large, top-down highways the Omaha region is spending significantly more money on, without complaint from Buffett.
From an investment perspective, there is one important nuance to note, and it gets to why Buffett is calling for a public vote. The streetcar project does not require a public vote because it is being paid for by revenue bonds. In other words, money from the project itself—in this case, a Metropolitan Utilities District—is being captured to retire these bonds. If all goes well (a big “if”), no general funds should be tapped to pay for the streetcar. Again, I’m not cheering for this—I think there are still a lot of unanswered questions—but that approach is significantly different from how Omaha funds its auto infrastructure.
In 2018, 2020, and again in 2022, Omaha voters were asked to approve General Obligation bonds for transportation. This is money borrowed on behalf of taxpayers that the taxpayers agree to repay. Hundreds of millions of dollars, cumulatively far more than the streetcar. There is no district where revenue is being captured from. There is no set of corresponding private investments to pay for this borrowing and spending. The spending is pure consumption, with taxpayers voting for things today that they can’t afford today, promising to pay—or have others pay—for those things in the future.
I think it is fair to point out how Warren Buffett, an iconic investment guru with a staggering track record of success, is motivated to break his own code of silence on local issues by a streetcar project that at least has a figment of a plan to pay for itself, yet he is silent on literally billions of dollars of transportation spending, and hundreds of millions of recent public debt, incurred in building road and highway projects.
Like nearly all Americans, Buffet is not motivated by thinking of this as a public investment decision. He is not doing a cold, rational analysis of the numbers to determine the most prudent course of action for Omaha’s transportation spending. And neither is anyone else. That, sadly, makes Buffet a very ordinary thinker in a public investment realm that desperately needs the kind of analysis he is said to apply to his private investment decisions.
Then again, going back to Taleb, it may be that Buffett is not exceptionally insightful, but has merely had a run of good fortune. In a business world with millions of players, it had to happen to someone.
The financial struggles of Houston and the cities of the Silicon Valley area—as well as tens of thousands of others across North America—have the same underlying cause.