Warren Buffett's Legacy

Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) founder and CEO Warren Buffett is perhaps the biggest name in finance today, and his ideas and writings have influenced an entire generation of investors. What will history make of him? Financial analyst Kristine Harjes and senior banking specialist John Maxfield look back on the business magnates of the past to come up with an answer.

Next, we open up the mailbag to respond to some Foolish questions on banking and finance: Is Euronet (EEFT 1.85%) in competition with the major credit card companies? How can investors benefit from increased payments processing volume as the economy improves? Tune in to find out!

A full transcript follows the video.

Kristine Harjes: Warren Buffett's true legacy; this is Industry Focus.

[INTRO]

Hello, hello! This is Kristine Harjes, and you're listening to the financials edition of Industry Focus. I've also got our senior banking specialist, John Maxfield, on the line. How are you today, John?

John Maxfield: I'm doing great. I hope you had a nice long weekend. For those of you who don't know, the market was closed on Friday for Good Friday -- so it was truly a good Friday, since we didn't have to work.

Harjes: Indeed! I got to make a trip up to see the folks in New Jersey, so it was a good long weekend for me.

Today our topic is none other than the Oracle of Omaha himself, the multi-billionaire and founder of the enormously profitable conglomerate, Berkshire Hathaway. As I'm sure you guys have already caught on, I'm talking about none other than Warren Buffett.

Buffett is arguably the biggest name in finance today but, at 84 years old, it's well acknowledged that his career is winding down. What we'd like to dig into today is the question of the future of the Buffett name. What will be his legacy?

It's undeniable that Buffett's achievements are admired far and wide today, and many would conjecture that Buffett's name will certainly go down in history. But John, from what I understand your opinion is a little bit different there.

Maxfield: That's exactly right. Now, let me be clear. I am a huge fan of Warren Buffett, like many investors are. I haven't read all of his letters, but I've read probably 80% of them.

If there's anything that has molded my philosophy toward investing, and even business more generally, it has been reading Warren Buffett's letter to the shareholders of Berkshire Hathaway, which are available for free on the Berkshire Hathaway website. They're just a trove of knowledge and pithy anecdotes about investing, that are fantastic.

However, when you think about let's say 100 years from now, what Buffett's role will be in history, that is a much more difficult question to answer than how big a role he plays in society today.

I actually just wrote an article about this, and that was something that we talked about earlier today. I actually think he will play a much more muted role in history than what the average person today would probably think.

Harjes: Why is that?

Maxfield: There are a number of reasons for that. If you think about it, go back in history maybe 150 years.

Think about what names really stick out to you in the business community in terms of businessmen who played a pivotal role in American history. I don't mean just in business history, I mean in history more generally, that students learn about and will continue to learn about for many, many decades or perhaps even centuries.

You think about guys like Cornelius Vanderbilt. You think about guys like Andrew Carnegie, like Henry Ford, John D. Rockefeller. The question is, what is it about these businessmen in particular that makes them play such pivotal roles in history books? There are a number of things.

First and foremost is that all of these men -- and I'm sure there are many women in history who have done the same thing, and there will be many to come, and probably a large percentage of them to come as time goes on -- but they created either products or processes that live with us today, or that at the time played a huge part in getting the United States from one economic trajectory onto another economic trajectory.

Cornelius Vanderbilt gave us the New York Central Railroad. He gave us steamship lines. These allowed us to get back and forth to California during the gold rush. They allowed us to get to the Ohio River Valley to get all that agriculture out into the New York region so we could trade it with Europe.

These were very central things and Buffett, even though he is an incredibly commendable and remarkable man, and he's behind an incredible and huge conglomerate, Berkshire Hathaway, he hasn't actually created anything that will -- I don't know the right way to say this -- that will really push our economy to the next step, like many of those moguls of the past.

Harjes: You're saying that there have been men that have transformed an entire industry, and there's tangible evidence that they had such an impact.

Warren Buffett's achievements maybe don't quite stand up despite having, in my opinion at least, completely transformed the way that people think about investing; especially your everyday investor who reads his letters, which are a tangible form of evidence of his contribution, and have learned from that and have been able to dive in and try to emulate some of Buffett's success.

You think that still, comparatively, Buffett's name is not going to last in the way of, say Henry Ford.

Maxfield: That's exactly right. Henry Ford is a perfect example. Henry Ford gave us the assembly line. He gave us mass production. He democratized the automobile. These are at the core of the American psyche.

Andrew Carnegie gave us steel. He didn't invent steel, but he industrialized steel, and by industrializing steel it allowed for massive bridges to be built. It allowed for skyscrapers to be built.

These are things that fundamentally transformed the United States of America, and helped us to ascend to the top position in the global economy.

Warren Buffett, his innovation -- which is incredible! You have to be completely brilliant to come up with these things; in hindsight they look obvious, but when you're looking at it in real time it's incredibly brilliant insight.

His innovation was to use insurance floats to build a large and sprawling corporate conglomerate. Every month, people pay premiums to insurance, and then in the future at some point a chunk of those people will get a large share of that money back.

In the meantime, between when you pay your insurance and when it's paid back to you in the event of some type of catastrophe or other triggering event, insurance companies can use that to invest and make a profit for their shareholders.

That's what Berkshire did, but he did it not by investing in U.S. Treasury bonds and other passive assets. He bought all of these other companies. He bought See's Candies, he bought Burlington Northern Santa Fe Railroad, Dairy Queen, just dozens and dozens of these subsidiaries.

The question is, to the average American, what difference does it make that Warren Buffett used insurance? His innovation was using insurance floats to make profitable investments. I would argue that it makes very, very little difference, if any whatsoever, in the future of the United States and even in just your average American today.

Harjes: His most important contribution, as far as systems goes, is not so much what he's going to be remembered for. I definitely agree with you there.

I think even though Berkshire is set up to continue to be successful even after Buffett is not a part of it anymore, I actually kind of think that Buffett is not going to be remembered so much for causing some revolution in the world economy, but actually for his charity.

His charitable efforts are nothing short of incredible, and that is where I personally think that Buffett really stands poised to leave a mark on history that will be remembered, much down the road.

Maxfield: Yes, and I think there are two sides of that charity thing.

When you look at, again, the business magnates of old, a lot of them also contributed a large amount of money to charitable causes. But how did they do it? They did it by injecting that money into organizations that were named after them.

You have Alfred P. Sloan, who was the head of General Motors (GM 4.37%) at one point, and got it through very critical time periods early on in the company's history. He didn't have any children. He put all his money into a variety of charitable causes, principally the Alfred P. Sloan Foundation, which invests in and funds a lot of different things. But it's called the Alfred P. Sloan Foundation.

Andrew Carnegie, again, childless. The lion's share of his money went to charity, but he did things like Carnegie Hall, the Carnegie Institute. Again, these are all named after him.

Warren Buffett, what did he do? He is giving almost all of his fortune, 90 some odd percent of it, to the Bill and Melinda Gates Foundation. It just goes to show how rational Warren Buffett is and how selfless he is, because he's not giving this money to create a legacy for himself.

He's giving all of his money to an organization that he knows, by observing it -- Bill and Melinda Gates are good friends of his -- by observing how good they are and how effective they are at accomplishing their objectives, like getting rid of malaria and all these other various diseases in the world.

This incredible thing; and to your point, his money will probably go a lot farther than many of the moguls of the past. However, I think it's fair to assume those accomplishments will be more associated with Bill Gates than they are with Warren Buffett.

Harjes: Right, so maybe it's not so much the Buffett name that's going to live on, but in fact what he has actually done with this money. That's not to take away from the charities that are named after their benefactors, but it is all the more admirable that you've got this guy who just wants to spread good for its own sake.

Now that we're feeling all warm and fuzzy, I actually wanted to save the last bit of our episode to move on to some listener questions that we received over the last week.

In case you guys think that's a really questionable segue, I'm going to throw it out there that hearing from you guys gave me some of those warm fuzzies. It was really, really great to hear from everybody and get a sense of what's on your mind.

There were two questions in particular that we got, that we wanted to discuss on the show, the first of which comes from Tom, writing to us from Malaysia. Tom, by the way, says he's been a Fool for over 15 years. Fool on!

He was wondering about a company called Euronet, which is a $3 billion market cap company that specializes in ATM and money transfer. Specifically, Tom wanted to know if they are a competitor to MasterCard (MA 1.33%) or Visa (V 0.65%). John?

Maxfield: The easy answer to that question is that yes, they are a competitor to Visa and MasterCard, and we'll throw American Express (AXP 2.56%) into the mix as well. Euronet is a company that was formed in Hungary, founded in the mid-90s, I think in 1994, but they really started up and going in 1995.

What it does is it process payments from roughly 20,000 ATMs and 69,000 point of sale businesses; retail businesses, convenience stores, gas stations, things like that. It focuses on Europe, the Middle East, and Africa.

Of course obviously Visa, MasterCard and American Express, I've never actually traveled to the Middle East or Africa but I've been to Europe a number of times, and obviously Visa, American Express and MasterCard are accepted there.

In that respect it is a competitor, but the question is not whether it's so much a competitor, but whether from an investor's perspective it's a viable competitor.

While it has a lot of room to grow obviously, because it's a fraction of the size of Visa and MasterCard, one has to wonder if it's going to be able to nose into a field that is dominated by giants like this, which would obviously impact future investment returns.

Harjes: Right, so even though that is the thesis right now for this company, it's anybody's guess as to whether or not they'll actually be able to grow like that?

Maxfield: Well, it's certainly an uphill battle. Vis, MasterCard, and American Express are the dominant players, so it has to affirmatively take market share away from these otherwise very well-run companies, and you can rest assured that that is something that neither Visa nor MasterCard nor American Express is willing to voluntarily surrender.

Harjes: Yes, especially because these companies do have such a great network effect.

On a related note, our next question is from Tim in Charlotte, North Carolina, who mentions that he's been a longtime shareholder in Alliance Data Systems (BFH 4.76%). He was looking for some discussion of payment processors as well.

The thesis that we're looking at as a whole here is that in the U.S. and the world on the whole, the economy is on the upswing and, right along with it, credit card activity is climbing. If you're looking to profit on this increase in payment processing volume, what are some companies to consider?

Maxfield: Tim pointed out the obvious ones; Visa and MasterCard. Obviously American Express is another one. But the company that I would go with in this regard is -- and this may come across as somewhat surprising for people who don't know a lot about the payments space -- is US Bancorp (USB -0.20%).

I say that for this reason. US Bancorp is the United States' largest regional bank, if you assume that Wells Fargo (WFC -0.26%) is kind of a money center bank, which I think it is nowadays, considering how large it's gotten.

But US Bancorp has an extremely outsized payment processing business, and it's one of the reasons that it's able to both keep its expenses low, because it's such an efficient operation, and generate such a large return on equity.

I would say, look. If you're an investor and your thesis is that the economy is going to eventually pick up, which I would agree with although it's impossible to predict when that's going to happen, and that when the economy picks up the volume of payment transactions will increase as well, and that when the volume of payment transactions increases that that will generate more revenue for payment processors ...

If that's your thesis, then the direction that I would go in is US Bancorp, and I would go in it for two reasons.

Number one because it's so big in the payments space, but number two because it has proven through many decades of successful, highly profitable operations through a handful of very difficult time periods, the financial crisis being one of them, that it can generate a large return on capital for their shareholders.

That's what you want in a financial space like this, and you get the benefit of having not only the revenue from the payments space, which is non-interest income, but you also get -- with a bank like US Bancorp -- all the revenue from their interest rate arbitrage; making loans, using deposits to make loans.

With interest rates so low right now, you'll get a double boost because when the economy picks up, that's when the Federal Reserve will start to increase short-term interest rates. As you increase short-term interest rates, for a bank like US Bancorp, you will boost their net interest income.

At the same time that they're getting a boost in their payments space, which accounts for roughly 25% of their net revenue, they will also get a boost on their net interest income side.

If you're looking for the real bang for your buck in terms of investing in a company that's going to see the biggest revenue increase as a result of the economy improving, I would go in the direction of a US Bancorp.

Harjes: Cool, great answer! I like this edition, of answering some questions. John, are you in the same boat there?

Maxfield: Yes, I agree totally. You know Kristine, I suspect a lot of people in media feel the same way. We talk to a lot of people in media, and sometimes you lose track of the things that are on the minds of various readers.

So when we get these emails like this, it's great for us not only to be able to answer their questions, but also because it makes us think about different things.

In future episodes, this is something that Kristine and I plan on, answering readers' questions, so please feel free to shoot us an email at the email address that Kristine will share with all of you. We appreciate all of you listening, and we enjoy answering your questions.

Harjes: Yes, it lets our listeners pick your brain a little bit instead of just me all the time! Folks, if you're feeling so inspired, drop us a line. The email address is [email protected].

Until next time, I hope everyone's basking in those first rays of springtime sunshine. Maybe take that Euronet or US Bancorp 10-K outside or something, and while you're at it, Fool on!

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.