Autonomous vehicles are shaping up to be the next breakout industry. Tech titans including Tesla (NASDAQ:TSLA), Uber, and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), as well as traditional automakers, are racing to develop viable self-driving vehicles, which experts expect could become common by 2020.
It's a huge opportunity. Not only could such a vehicles save thousands of lives every year by preventing accidents, they would also transform the way people and products get around, lowering costs by eliminating the need for drivers, and potentially transforming the dreaded daily commute. But at least one billionaire investor will be sitting out the self-driving revolution.
Warren Buffett, CEO of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), is well known for his consistent refusal to invest in tech companies, but his reasoning is often misunderstood. He avoids emerging technologies not because he doesn't understand them, as is often reported, but because the winners in such markets are so hard to predict.
In 1999, with dot-com boom approaching its peak, Buffett was criticized for refusing to invest in the new wave of internet stocks, but his explanation is an excellent defense of his strategy and a prescient statement about the bust that followed.
In a Fortune article, the Oracle of Omaha compared the internet boom to those experienced by two other transformative industries earlier in the 20th century: the automobile and the airplane. Buffett noted that there have been about 2,000 American car manufacturers, most of them active at the dawn of the automobile age, but only Detroit's big three survived. Similarly, in aviation there were about 300 manufacturers in existence from 1919 to 1939; only a handful are still around today.
Buffett summed up the lesson and his investing philosophy this way:
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
In retrospect, Buffett was right about the dot-com era. Only a few stocks survived the bust and went on to thrive, and while you could have made a bundle betting on Amazon.com or priceline.com, many more companies like Pets.com and Webvan ended up folding. Similarly, while the smartphone has made a fortune for Apple investors, it's also led to to busts for companies like Blackberry, Nokia, and others.
Buffett's look back at prior emerging industries is telling. Innovative technology alone does not provide as wise of an investment opportunity as it might seem.
His preference for stable companies with competitive moats over growth stocks and tech start-ups has given Berkshire market-crushing returns, and made thousands of investors rich alongside him. Financial companies like Wells Fargo and consumer-facing businesses like Coca-Cola exemplify his strategy. A big bank or a company with the distribution reach and brand portfolio of the leading soft drink maker will be very difficult to dethrone. Their growth rates may not equal those of younger companies in emerging markets, but Buffett is focused on durability of competitive advantage. In the autonomous vehicle industry, there are simply too many variables in play for an investor like Buffett to make a smart bet. That doesn't mean there aren't opportunities, but there is likely more risk than you'd think.