Peter Knight compares purchases with Warren Buffett

In the same week that Warren Buffett bet $26bn on the future of the US railroads, I invested $9.99 on a gadget guaranteed to sharpen my razor.

Both Buffett and I were thinking green, but I believe my bet was a lot more economically disruptive. Or was it?

Instead of a halo, Buffett’s investment aura looks like a Venn diagram, combining the coronas of Nelson Mandela and the Dalai Lama. Now 79, Buffett is as active as ever and his decisions throughout the Great Recession look likely to keep his investors and their kin well fed for many generations.

His conglomerate, Berkshire Hathaway, has bet big on what it sees as the inevitable rise in the cost of oil. It is one of the country’s largest investors in wind farms and now owns one of the biggest railroads in the US, the Burlington Northern Santa Fe Corporation.

Early in the last century, the oil companies bought up and closed down much of the US passenger rail network in a successful bid to get people into cars. But considerable amounts of heavy goods, mainly coal and corn, are still dragged across this massive country by train.

Buffett’s rail investment might at first seem a bit retro, but the logic is simple: as the economy improves the American consumer will reawaken and start spending again. Goods will have to be shifted at the very time that demand will push up the cost of oil. Because of the efficiency of rail, Burlington Northern will be able to ship things much cheaper than road and air.

Buffett’s critics say he is right on technology but wrong on the geography. He should be investing in Asia, or in Australia, which will have to ship its raw materials to mineral-hungry China. The heavily indebted US economy is in terminal decline, they argue, and the spending power of the US consumer will never again be the engine of world growth.

Enter my blunt razor. The safety razor business model is based on selling the handle cheaply and massively over-charging for the blade. Actually, that should be in the plural: you don’t get a single blade any more, you get at least five. Five blades that don’t give you anywhere near five times as many shaves.

These blades cost so much that they are mostly held securely behind the counter. You have to ask for them specially, like cigarettes and expensive nips of Hennessy.

Hooked

When I saw a TV commercial for a blade sharpener I was hooked immediately. I remember my grandfather had a similar contraption that was popular during the war. It was a clever little box with a lid connected to a cam that drove a short leather belt. You inserted the single blade, shut the lid, and pumped it vigorously backwards and forwards to sharpen the blade.

My $9.99 model is super high-tech and needs a battery. You insert the razor into its mouth, press a button and in five second the blades are sharp. This is highly disruptive to the business model of Gillette et al. Think of the drop in revenue if every shaver was to follow my lead and get, say, twice as many shaves from their multiple blades. Think of the reduction of waste.

Razor sharpening is but one of the many cost-saving activities that have become popular – even fashionable – in the new age of frugality that has settled on this great consuming nation. The implications could be significant if consumers continued to stay away from the shops and invested instead in sharpeners and fixers.

It would certainly be a greener world, one for which many are campaigning. But such an outcome is unlikely. Recession-hit American consumers are beginning to suffer from a condition called “frugality fatigue”. This state of mind is encouraging consumers to spend again, in an attempt to bring some joy into their lives. This is the reason given for the unusually high sales in footwear, recorded in the same week that the unemployment rate breached the 10% mark.

It seems that consumers are tired of fixing their boots. Let us look at something that’s shiny and new, they seem to be saying.

Frugality fatigue is, I am sure, calming the nerves of the Gillette executives who are probably working on ways to add yet another blade to their razors, and maybe a nasty little toggle designed to shred my sharpener.

So much for my disruptive investment. Buffett, who prides himself on his understanding of human nature, has got it right again.

Peter Knight is president of Context America.
peter@contextamerica.com
www.contextamerica.com