By Steve Garmhausen

Is the U.S. economy as strong as the latest numbers indicate? Jay Winthrop doesn't think so. The managing partner of New York-based Douglass Winthrop Advisors, which manages $6.3 billion in assets, believes tariffs could prolong inflation, harm supply chains and dissuade businesses from investing. He believes unemployment could rise, and that long-term interest rates are likely headed higher, regardless of Federal Reserve policy. "I think the economy is weaker than the hard data suggest," he says.

Speaking with Barron's Advisor, Winthrop, whose firm this year joined our Top 100 RIA Firms ranking, explains the challenges tariffs pose to the high-quality stocks the firm prefers. He explains why the risks faced by holdings Berkshire Hathaway (leadership transition), John Deere (tariffs) and Microsoft (massive AI investment) are surmountable. And he tackles an aspect of AI that few investors like to talk about: its environmental impact.

What's your investment approach? I would define us as being quality value. We're not in a style box; we're not large cap or small cap or growth or value. We're really about a quality orientation. We have a concentrated portfolio of about 30 companies, and we hold these companies for a long time. Our average holding period is five years. We've owned companies like Alphabet and Mastercard and Berkshire since early on.

We look for companies that have wide economic moats. Think about Canadian National Railway, Mastercard, Costco. These moats allow them to survive through weak economic periods but still earn high rates of return on capital and retain customer loyalty.

Secondly, we look for companies run by management teams that are oriented toward shareholders. That's important for us. That is reflected in quality of earnings, in executive compensation, in the way they communicate with stockholders, and, importantly, in the way they allocate capital. We love to own companies, Berkshire being a great example, that can earn a lot of money and reinvest internally. Other things like financial strength and valuation are important, but our North Star is quality value, with value to us being market price at a discount to intrinsic value.

How do you explain the disconnect between the hard economic data we're seeing out there, which is positive, and the weak data for soft indicators, like consumer confidence? I think the economy is weaker than the hard data suggest, and that's due in part to the lag effect of tariffs, and to the national debt, which is crowding out a lot of investment capability. We're now spending $1 trillion on interest, which is more than we're spending on national defense. As you see every day in the paper, we have persistent inflation. The rate's come down from 9% to 3%, but price levels haven't come down. And then you have the unknowable global risks. We can all tick off what we think the risks are, but we probably don't know the thing that's going to take us down.

How are tariffs impacting your portfolio companies? I hear a higher level of uncertainty expressed by CEOs and management teams when it comes to making investments. If you've got a supply chain that has been in country X for a long time, and you hear that's now out of favor, are you really going to reorient your supply chain entirely to go to another country? Because you're a little bit worried that that country might also become subject to tariffs. And there are serious costs to onshoring everything.

Would you share a bull and a bear scenario for the economy? I think the bull case is that the deregulation effects of the Trump administration will outweigh the negative effects of tariffs. If the Fed reduces rates, we're going to support housing and corporate investment, and the renewed capital expenditures will accelerate job growth. I think the bear case is more compelling: Tariffs will prolong inflation, they will suppress investment, they will harm supply chains, they will harm business confidence. I also think that long-term interest rates are going to rise no matter what the Fed does in the short run. And then there's the chance that unemployment may rise. You're already seeing a little bit of that.

I wrote our client investment letter early this year on the parallels between 1972 and the very end of 2024. It was extraordinary, almost to the data point. You had the same fed-funds rate, the same inflation rate, very similar concentration in the equity market. You had similar price behavior around gold and oil. Even politically, you had a Republican candidate coming in from the wilderness and re-elected in a landslide. You had the parallels with China. But what's instructive is not just the similarities between 2024 and 1972 but what happened for the ensuing decade.

The '70s were really tough if you were invested in the most popular stocks. You had inflation and stagflation to some degree. I'm not at all suggesting that's exactly what we're facing. But the parallels are dramatic enough to suggest that we should temper our enthusiasm for the biggest and best stocks and for economic growth. I think it's quite likely that we'll hit a speed bump and have to navigate around a lower-growth environment.

Can you talk about investment themes that you like? We're bottom up, fundamental-value investors, but themes still inform us. The first is this concept of "winner take most." I look back at our purchase of Alphabet, then Google, in 2010 at $10 a share. We've earned 30x in 15 years in that one security. We bought Mastercard in 2011 at $27 a share; that's 25x. Costco, Berkshire, even Uber, a much later purchase, have done similarly well. Mind you, we've had our share of losers. My point is that in some of these industries, most of the value accrues to the dominant mover, not the first mover. Even if the second- or third-best company is much cheaper, most of the value accrues to that market leader.

Two other quick things. One, the United States is 4% of the world's population and more than 40% of its market cap. And you know all the data related to the S&P valuation concentration. It defies logic to believe that 10 or 15 years from now, that same statistic will be accurate. We don't quite know how to express it, but we're thinking a lot about a billion Africans coming into the workplace over the next 15 years. It's not easy to express that by buying African publicly traded securities, but it is possible to invest in businesses that are going to address that demographic shift. So demography and the likely decline in relative GDP by the United States is a factor.

The final theme is the infrastructure rebuild. We have owned Martin Marietta Materials forever and Fastenal and Canadian National Railway. We believe investors have over-invested in companies like Snapchat and things like that, and underinvested in core infrastructure.

Africa's potential is fascinating. It's the continent of hope, and the hope is that it actually realizes that hope. One of the things I love so much about what I do is that it has given me time to do nonprofit work. I was chairman of two environmental groups. I also did a short stint as an advisor to the State Department Advisory Committee on International Economic Policy. We didn't do much, just observed and occasionally made a comment on investment treaties or trade agreements. But this whole area is something I'm very interested in, and to some degree it informs my work as a portfolio manager.

Berkshire Hathaway is your largest position. Many investors worry that no one can fill Buffett and Munger's shoes. I think they're right. Berkshire is unlikely to be as good a company as it was under Warren and Charlie, but it's still going to be a plenty good company. Berkshire today earns a billion dollars every month in risk-free interest on its Treasury bills. Forget about their wholly owned subsidiaries or the utility business or the rail business or the insurance business or the equities they own. That business is growing in enterprise value every day with a very low degree of risk. There are all kinds of theories out there for why Warren has cleaned up the balance sheet so much and gone so hard to cash -- Berkshire now has $300 billion of dry powder. It could be his view of asset prices, but it also could be his desire to have a clean slate for incoming CEO Greg Abel and his team to deploy that capital. It could be that the company is preparing for the day when they'll do a substantial stock buyback related to Warren's estate.

I can tell you for sure that on the investment side of the balance sheet, Berkshire has not distinguished itself in recent years. We're overdue, I think, for Berkshire to show us some creativity there. On the liability side, they've made most of their money through getting zero-cost funding. They do a wonderful job funding their investment activity at close to zero. They haven't done a great job recently on the investment side. We don't know Greg Abel personally, but we're confident enough that Greg will deploy that capital wisely.

Berkshire is a great hedge in a long-only equity portfolio, particularly now that it trades at a very undemanding valuation. I think it's actually quite cheap relative to book value. As a hedge, as a store of value, as a way to sleep at night, I think Berkshire has a great role in the portfolio today.

Coming back to tariffs, what are your thoughts on portfolio holding John Deere, which imports lots of steel and other materials. Tariffs affect Deere in all kinds of ways, in their input costs and their steel costs and manufacturing operations. A related risk is the health of the agricultural community. For Deere to do well we have to have a farm sector that is bullish enough to start its overdue replacement cycle.

The reason we're positive on Deere, and this is not going to sound particularly analytical, is that the world needs more food. And that need is not going away. We talked earlier about winner take most; Deere is the undisputed leader in ag equipment globally. They're a clear beneficiary of the trend to supply the world with protein. And Deere itself is becoming more of a tech company. It's getting a lot more recurring revenue from software and services related to making farmers more productive.

Finally, if you look at Deere over a long period, there are these three- and four-year periods where its stock price doesn't do anything, and then the stock does well. Our analysts feel that we're nearing the end of the bad cycle, and Deere is showing signs of improved profitability.

You own Microsoft, which of course is investing heavily in artificial intelligence amid fears that companies are over-investing in AI. Your view? Microsoft is investing a ton of capital, no doubt, but so many companies are. I agree with the premise of your question, that we're in a period of exuberance bordering on overinvestment. I'm not sure what the alternative is: At this point, AI is an arms race.

Microsoft has done well, on paper anyway, with their investments to date. Their product offerings like Copilot are finding pickup in the market. And it's not really a bet-the-company strategy for Microsoft. It's not like Nvidia, which is so tied to the adoption of AI. Microsoft is one of the great businesses in the world, with an incredibly robust moat. They are investing a lot in AI, but we think their investments to date have been prudent and profitable, and so we're comfortable with it.

You mentioned your volunteer work on the environment. Do clients ever express misgivings about AI's environmental impact? We have two strategies; the core strategy we've been talking about has a little over $6 billion. We have a much smaller strategy we call our sustainable equity strategy, which is focused on the factors we're talking about today with another element focused on economic opportunities arising from climate and environmental factors.

Clients of that strategy do raise this question. This may sound a little glib, but one answer might be, well, let's develop AI so that it can help us get to renewables faster. There's no question that the energy footprint of AI is environmentally destructive and worrisome. But perhaps part of the solution will come in developing AI quicker.

Thanks, Jay.

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December 12, 2025 13:22 ET (18:22 GMT)

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