Warren Buffett’s 1999 Quote That Should Terrify EV Investors

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Investors have recently become very enthusiastic about electric vehicle companies. Thanks to vast improvements in battery technology over the past decade, electric vehicles are now approaching cost parity with gasoline internal combustion engines. When you combine this with concerns about global warming and the trend towards ESG investing, the growth prospects for electric vehicles, which today represent only 2.8% of new vehicle sales, do indeed look promising.

But before you invest in any of the EV companies out there – many of which are now going public to raise funds at favorable valuations – heed Warren Buffett’s warning from 1999 about investing in industries. growth. He gave the warning during the 1999 Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) annual meeting on the eve of the dot-com bust, but the concept still applies today.

Buffett is not generally a fan of the auto industry. Image source: The Motley Fool.

Don’t forget about cars and airlines

All-electric vehicles are the breakthrough transportation innovation of the early 21st century, just as the internal combustion engine won over investors at the turn of the 20th century. Imagine being a smart investor in the late 1800s and getting an early glimpse of the first automobiles. There is no doubt that many would have invested in an invention which did not fail to make a fortune for the first investors.

The same could be said of airlines. Clearly, the airplane was going to revolutionize travel and change society forever. So that also had to be a promising investment, right?

A “difference between making money and spotting a wonderful industry”

In 1999, Warren Buffett and his partner Charlie Munger were asked about the possibility of investing in Internet communications stocks, which exploded after the Internet spread in the early 1990s. Berkshire had not touched them, so means Buffett was missing a booming market at the time.

In response, Buffet said:

You know, the two most important industries of the first half of this century in the United States – probably in the world – were the automotive industry and the aircraft industry. Here you have had these two discoveries, both in the first decade – essentially the first decade – of the century. And if you foresaw, in 1905 or so, what the automobile would do to the world, let alone this country, or what the airplane would do, you might have thought that this was a great way to to become rich. But very, very few people have gotten rich by being – by turning their backs on the auto industry. And probably even fewer became wealthy participating in the airline industry during this period. I mean, millions of people fly every day. But the number of people who have made money carrying them is very limited. And the capital was lost in this business, the bankruptcies. It has been a terrible business. It was a wonderful industry. So you don’t necessarily want to equate the growth prospects of an industry with the prospects of growing your own net worth by participating in it.

Why did the first automobile or air investments not succeed? There are a number of reasons, including the capital intensity of these companies and fierce competition.

The auto industry needs to build expensive factories to grow, and airlines have to buy or lease planes to serve their customers. Both industries also have a history of unionized labor. These characteristics give everyone high fixed costs.

If demand declines for any reason – whether it’s an economic downturn or theft of customers by a competitor – those costs remain, leaving airlines with half-full planes or automakers operating airplanes. factories at less than full capacity. This is why so many airlines and automakers have gone bankrupt over the years.

The EV industry is similar

While electric vehicles are innovative and beneficial to society, some of these unfavorable business characteristics remain.

That doesn’t mean you should avoid the area altogether. But if you invest in any of these companies, you really have to believe that the company has an edge over its competition through technology, brand power, financial power, or management. This advantage, or competitive gap, will be necessary to navigate the ups and downs of this high fixed cost industry and to protect your investment capital.

This is all the more true given that a number of electric vehicle manufacturers have only just battled current leaders like Tesla (NASDAQ: TSLA) – not to mention almost all of the old car manufacturers who are now turning to electric vehicles. Whether electric or gasoline, the auto industry is likely to remain fiercely competitive for years to come.

If I were to bet which public EV company might have some sort of a moat, it would be Tesla, thanks to its branding value and top-notch battery technology, which it will update for investors on September 22. That said, with its meteoric rise this year, I think Tesla’s valuation has taken a step ahead.

If you think you have truly found a competitively advantaged electric vehicle business at a reasonable price, then invest. But if you do, heed Buffett’s warning and enter the investment with your eyes open.

As Buffett himself says: investing is simple, but not easy.



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