Warren Buffett and Energy from the Gobi Desert

Dec 23 2012 Published by under Energy from the desert

Bill Gates recommended on Twitter a new book with the title “Tap Dancing to Work” about his friend Warren Buffett, and also reviewed it on his personal website.

I have followed that recommendation and have just finished reading. I agree with this assessment in Gates’ review:

Examining the arc of Warren’s business life in his own words and those of other gifted observers (preeminently, Carol Loomis, herself) is an extremely worthwhile use of time – to get into the mind of this remarkable business leader and philanthropist.

With this post I would like to think about how a business case for investment in the Gobi desert project would need to look like as to attract an investor that follows Buffett’s ideas.

Trust

For one, Buffett said that he only invests with people he likes, trusts, and admires. And he himself values his reputation very highly. Trust takes a long time to build, but can be destroyed very quickly.

If that is a requirement, forget about investing in Mongolia as long as you need trusting the Mongolian government. They have not yet build a long track record of being worthy of trust. If anything, the latest developments around the Oyu Tolgoi mine would be an excellent way to destroy a reputation, if there was one to begin with.

It follows that any investment in a Gobi desert project needs to be guaranteed by some other party worthy of trust, like the World Bank or the European Union.

Simplicity

Next, the Buffett school of investment steers clear from anything not easily understood. That’s why Buffett missed out on buying stock of his friend’s Bill Gates’ company, as well as loosing more money than Masayoshi Son once the Internet bubble burst.

That requirement is easily fulfilled. All the technology necessary for this project is there, and it is easily understood. There is no need to develop new technology, as Bill Gates tries to do with his interest in developing a new form of nuclear reactor.

And it does make sense to build a large energy source right next to the largest energy market, and to build large scale renewable energy where there is limitless area available to do so.

Long Term View

One other aspect of Buffett’s thinking is the long term orientation. He doesn’t know or care where the stock of a company he buys may be a couple of months ahead. In contrast, he wants to know where it will be ten years out.

That is an excellent match for energy projects. These are by their nature very long term.

The one long term development that is already impossible to stop is the complete transition from fossil fuel to renewable energy on a world wide scale, which is easily the largest infrastructure project ever, beating the Internet by a couple of orders of magnitude.

So what is supposed to happen ten years out, and beyond that horizon?

Several things are clear already. Solar power and wind power will be even cheaper, and they will beat coal in less than a decade on price (not considering any price on carbon).

After having paid for themselves in ten or twenty years, solar panels in the Gobi desert will still be able to produce electricity, for basically zero cost.

And China’s appetite for energy will have gone up in the next couple of decades, while it’s appetite for even more pollution by dirty coal will go down.

Looks good to me.

Investor Value

Buffett has become rich and famous because of his excellent investment record. The basic idea behind that was to buy valuable assets at low prices.

He would look at a company, figure out what it would be worth in a decade, and if he liked the price of the stock in relation to that future value, he would buy and keep the stock for the long term.

The ability to do that, more than anything else, is responsible for his success.

That obviously depends on someone else disagreeing with him. If he can’t find a seller that thinks the stock is worth less than he thinks, he won’t be able to secure all those bargains. In other words, his skill is only worth as much as the difference between his ability and that of the market in general.

For that aspect it helps that the concept of energy from the desert still is in its very early phases. It will take decades of efforts to get these projects up to scale. That in turn means that anyone getting in early will be at a natural advantage.

One part of Bill Gates’ success with Microsoft lies in the fact that he got in early in the business of developing software for the personal computer. The same is now possible for the energy sector.

Philanthropy

Finally, Buffett is a member of the “Giving Pledge” group of very rich people that have promised to leave at least 50% of their net worth not to their children but to charity. His personal pledge is giving more than 99 percent.

If so, it might make sense to choose investment opportunities also for their contribution to the common interest.

Solving the global warming problem with a large scale project of renewable energy from the desert would seem to qualify as well.

 

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