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Thursday, February 7, 2013

MORNINGSTAR: Extreme Outcomes

By M*_SamL | 01-25-13 | 03:35 PM

"We're going to have something in the way of a major nuclear event in this country. It will happen. Whether it will happen in 10 years or 10 minutes, or 50 years ... it's virtually a certainty."

When Warren Buffett uttered those words in 2002, he was effectively predicting that either Washington, D.C., or New York City will be nuked. A terrorist who goes to the trouble to obtain a nuclear device isn't going to blow up Peoria, Ill. Buffett later expanded his list of worries to include biological and chemical attacks.

Buffett's argument is simple. There are people who want to hurt us. The technology to apply a lot of hurt is becoming widespread. At some point, the stars will align and the people who want to hurt us will succeed. Buffett believes we can only delay the day of reckoning. (Admirably, he's funded efforts to slow or halt the proliferation of nuclear technology.)

Should we take Buffett seriously? He has the tendency to be prescient. Catastrophic risk is right in his domain of expertise, and so is being able to see things others don't. Berkshire Hathaway is a gigantic reinsurance operation, underwriting catastrophe policies involving disasters like terrorism, hurricanes, floods, and earthquakes. Buffett has made a lot of money as an oddsmaker. 

Disagreeing with Buffett is basically betting against him—something I don't do lightly.
I think his argument is persuasive. I've read up on counter arguments, but most appeal to how incompetent terrorists are and how hard it is to successfully execute a biochemical attack. That may be the case today, but it's not clear it will be the case 50 years from now.

Technology is always marching on, and the people who want to hurt us are always evolving—roll the die enough times and even unlikely outcomes turn up.

I'm not a paranoiac,
Samuel Lee
Editor, Morningstar ETFInvestor


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