With the latest quarter from Warren Buffett's Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) in the books and more than $60 billion worth of cash and cash equivalents on its balance sheet, all sorts of speculation has begun to arise about Buffett's next big investment.
While we don't know where it will end up, a remark from Buffett nearly 20 years ago reveals one place we know that money almost certainly won't go: into the 3D printing industry via companies like 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS).
The important insight
The 3D printing industry has piqued the interest of many investors and has been declared the next frontier of innovation in the world.
CNN ran a special report Dawn of a Revolution: How 3D printing will reshape the world. U.S. President Barack Obama said during his 2013 State of the Union Address, "3D printing has the potential to revolutionize the way we make almost everything." And as colleague Steve Heller noted, Elon Musk has been an active advocate of the capability of 3D printing through his SpaceX endeavors.
So, why wouldn't one of America's greatest investors be at the forefront of those seeking to profit from 3D printing, one of the pillars of the Third Industrial Revolution? A remark from Buffett in the 1996 letter to Berkshire shareholders reveals the answer:
In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.
In addition, his words in 2001, after the collapse of the dot-com bubble, provide a clue: "At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We're not smart enough to do that, and we know it."
In short, Buffett knows there will be great investments to be had in any industry undergoing massive change through innovation, but he also knows such industries are well outside of his circle of competence, and rather than dive into them, he just avoids them altogether.
What we can learn
Does this mean we ourselves shouldn't invest in any companies in the 3D printing industry?
This isn't cut and dry; the answer ultimately is that it depends.
Buffett would go on to say:
Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.
If you are well-versed in the 3D printing industry, the complexities of it, as well as the capabilities and investment prospects of the companies therein, then your impediments to making an intelligent investment decision are vastly reduced.
But if you are blindly pouring money into companies in the industry because it's the next hot thing, then the example of Pets.com -- which raised $82.5 million in its IPO in February of 2000, but collapsed just nine months later in November -- and the countless other casualties of the dot-com bubble should remain fresh in your memory.
Buffett concluded his remarks by noting:
I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride.
3D printing is exciting, but that doesn't mean it makes for a great investment for many of us. Buffett included.
Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends 3D Systems, Berkshire Hathaway, and Stratasys. The Motley Fool owns shares of 3D Systems, Berkshire Hathaway, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.