Warren Buffett: If A $100 Billion Deal Came Along We'd Get It Done | May 7, 2018

TL;DR

Buy a broad cross-section of American businesses gradually and hold it for the long term instead of timing markets or chasing individual stocks. Buffett argues that equities have generally offered a better choice than government bonds, while emphasizing that stock valuations must still be judged against alternatives, especially prevailing interest rates.

Transcript

good morning guys it's great to see both of you and i am in omaha nebraska this morning that's the site of the berkshire hathaway annual meeting our special guest for the next three hours if you haven't figured it out already is berkshire's chairman and ceo warren buffett and warren thank you so much for being here this morning thanks for having me... Read More

Key Insights

• Long-term index investing is a practical strategy for average investors because it captures the progress of a broad cross-section of American businesses without requiring successful stock selection, precise market timing, constant attention to headlines, or repeated decisions about when to enter and exit the market.
• A $10,000 index investment made in 1942 with dividends reinvested would have grown to $51 million by the time of the interview, according to Buffett. His example illustrates how patience and participation in American business could outweigh wars, political changes, crises, and discouraging daily news.
• Buffett's first stock purchase was three shares of Cities Service preferred at $38.25 per share when he was 11. The price later fell to $27, he sold at $40, and it subsequently rose to $200, demonstrating the cost of selling a sound investment too quickly.
• Market headlines are poor guides for long-term investors because conditions looked grim when Buffett first invested on March 11, 1942. Ships were being sunk, the Philippines was approaching collapse, Europe was in crisis, and the Dow Jones had fallen below 100 after declining two points the previous day.
• The main risk for ordinary investors is buying one unsuitable stock or committing funds at one especially unfavorable time. Buffett says gradual purchases across a broad market reduce both dangers because investors will neither capture every low nor concentrate all purchases at market highs.
• Investor excitement often rises after stock prices have already increased because people see neighbors making money and feel pressure to participate. Buffett identifies this social comparison as a reason people enter markets at the wrong time instead of following a consistent savings and investment plan.
• Interest rates act like gravity on asset valuations because stocks must be measured against available returns from bonds and other assets. Buffett says a stock attractive beside very low government bond yields may become unattractive if government bonds begin yielding seven or eight percent.
• Government bonds can lose purchasing power when their returns barely exceed intended inflation. Buffett notes that historical war bonds compounded at 2.9 percent, while the Federal Reserve sought two percent inflation, and he argues that equities have almost always been the better long-term choice.

Questions & Answers

Q: How should average investors invest for long-term growth?

Average investors should save consistently and buy a broad cross-section of American businesses over an extended period, such as through an index fund. They do not need to identify the perfect stock, choose the perfect day, follow financial headlines, or listen continually to brokers. Spreading purchases over time reduces the risk of investing everything at a market high while preserving participation in long-term business progress.

Q: Why does Buffett recommend index funds to most investors?

Buffett recommends index funds because most people are not professional investors and do not need specialized security analysis to achieve a decent result. A broad index provides exposure to American business while limiting the danger of selecting a single bad company. It also lets investors avoid constant trading, market predictions, and emotional reactions to daily news while reinvested dividends contribute to long-term compounding.

Q: What does Buffett's 1942 investment example teach investors?

Buffett's March 11, 1942 purchase shows that frightening conditions do not necessarily justify avoiding long-term ownership of businesses. War news was grim, ships were being sunk, the Philippines was nearing collapse, and the Dow Jones had fallen below 100. Yet American business continued progressing. Buffett's larger lesson is that confidence in long-term national and business development mattered more than predicting every crisis.

Q: Why is market timing dangerous for ordinary investors?

Market timing is dangerous because people commonly become enthusiastic only after prices have risen and others appear to be making money. Social pressure can then entice them to buy at an unfavorable moment. Buffett says investors can avoid needing perfect timing by purchasing a diversified group of businesses gradually, accepting that they will neither buy every market low nor place all their money at a high.

Q: How do interest rates affect whether stocks are attractive?

Interest rates affect stock values by changing the returns available from competing investments. Buffett compares this effect to gravity. When government bonds yield very little, assets producing two or three percent can look relatively attractive. If long-term government bond yields rise to seven or eight percent, stocks purchased at current prices may no longer look attractive, and holders of existing long-term bonds could suffer substantial losses.

Q: Why did Buffett prefer stocks to Treasury bonds in 2018?

Buffett said that, if choosing among the S&P index and 10-year or 30-year United States Treasuries, he would select stocks immediately. His preference reflected the alternatives available at that time, not a claim that stocks are attractive under every interest-rate environment. He also acknowledged that he found it difficult to buy entire businesses, even though Berkshire had purchased a large amount of Apple shares.

Q: What mistake did Buffett make with his first stock purchase?

Buffett bought three shares of Cities Service preferred at $38.25 per share after the stock had declined substantially from earlier prices. It then fell to $27 before recovering. He sold at $40, but the shares later reached $200. The experience illustrates that purchasing cheaply is not enough if an investor lacks the patience to retain an investment through volatility and subsequent appreciation.

Q: Why can corporate and junk bonds be risky for average investors?

Corporate bonds can be difficult for average investors because evaluating credit quality requires knowledge they may not possess. Buffett warns that investors may be attracted to junk bonds at precisely the wrong time, when issuance is plentiful and protective covenants are absent. His point is that ordinary investors need not accept this complexity when a diversified equity strategy offers a simpler way to participate in long-term business growth.

Summary

In this video, Warren Buffett, the Chairman and CEO of Berkshire Hathaway, discusses various topics, including his thoughts on the Berkshire Hathaway annual meeting, the value of investing in index funds, the current state of the market, his views on Bitcoin, and his decision to stick with Wells Fargo despite its past controversies.

Questions & Answers

Q: How does Warren Buffett feel about the Berkshire Hathaway annual meeting?

Warren Buffett says that everyone at the annual meeting had a great time, as always. The crowd was record-breaking and shareholders and directors all enjoyed themselves.

Q: Has anything changed about the annual meeting over the years?

Warren Buffett states that the format of the annual meeting hasn't changed much because he and Charlie Munger, his business partner, prefer to stick with what works. However, he acknowledges that this year's meeting covered a lot of controversial subjects and gained a lot of media attention.

Q: Why does Charlie Munger often speak his mind using colorful language?

According to Warren Buffett, Charlie Munger has always expressed his thoughts openly and with colorful language. This has been his style since Warren Buffett met him in 1959.

Q: How did Warren Buffett use the annual meeting as a teaching experience?

Normally, Warren Buffett goes straight into the Q&A session during the annual meeting. However, this year, he decided to talk about his first stock purchase in 1942 and the lesson it taught him about long-term investing in index funds.

Q: What lesson did Warren Buffett learn from his first stock purchase in 1942?

Warren Buffett bought his first stock, City Service Preferred, in 1942 when the headlines were grim and the stock market was declining. Despite the uncertain times, he believed in the future of America and its businesses. His lesson is that if one invests in an index fund and holds it for a long time, they can benefit from the growth of the American economy.

Q: What other lessons did Warren Buffett share at the annual meeting?

Warren Buffett mentioned that regularly investing in a cross-section of stocks over a long period of time can lead to significant returns. He also explained that buying productive assets is more beneficial than investing in non-productive assets like gold or cryptocurrencies.

Q: What does Warren Buffett think about the current state of the market?

Warren Buffett mentions that Berkshire Hathaway hasn't bought any businesses in their entirety recently, but they have been increasing their stake in Apple. He believes stocks are a better choice for investors compared to government bonds. However, he notes that if interest rates rise significantly, stocks may be less attractive.

Q: Does Warren Buffett think the market is currently overpriced?

Warren Buffett doesn't think the market is overly priced at the moment, but he mentions that it's crucial to evaluate stock valuations in relation to alternative investments. He believes stock prices are justified considering the low interest rates.

Q: Why is Warren Buffett not investing in businesses entirely?

Warren Buffett explains that Berkshire Hathaway calculates returns based on an all-equity basis and does not rely heavily on borrowed money like many private equity firms. He also mentions that the current market conditions, where prices for businesses are relatively high, make it difficult to find attractive opportunities.

Q: What are Warren Buffett's thoughts on Bitcoin?

Warren Buffett considers Bitcoin a non-productive asset that relies on future buyers to create value. He believes that investing in something that produces value, like buying a farm or business, is more rational than speculating on cryptocurrencies. He also mentions the risks of getting caught up in speculative frenzies.

Q: How does Warren Buffett view Wells Fargo despite its controversies?

Warren Buffett acknowledges that Wells Fargo made significant mistakes in terms of encouraging improper incentives and suppressing whistleblowers. However, he believes in the fundamental business of Wells Fargo and has faith in the current CEO, Tim Sloan. He cites examples of other companies, including Geico, where opportunities arose due to similar situations.

Takeaways

One of the main takeaways from Warren Buffett's discussion is his belief in the power of long-term investing and the value of buying productive assets. He advocates for investing in index funds and a diversified portfolio as a way to benefit from the growth of the overall economy. While he acknowledges the flaws and mistakes made by companies like Wells Fargo, he also highlights the importance of taking action to rectify issues and learn from them. Additionally, Warren Buffett cautions against speculative investments like cryptocurrencies and emphasizes the need for rational decision-making based on understanding the underlying value of an asset.

Summary & Key Takeaways

• Buffett uses his first stock purchase on March 11, 1942, to show why frightening headlines should not dictate long-term investment decisions. Despite war, political changes, crises, and market declines, American business progressed. A diversified index investment with reinvested dividends would have benefited from that sustained progress without requiring market forecasts.

• For average investors, Buffett recommends saving consistently and buying a broad cross-section of American businesses over time. This approach reduces the danger of choosing one bad stock or investing everything at one unfortunate moment. Investors do not need perfect timing, daily financial news, or constant advice from brokers to achieve a decent result.

• Investment attractiveness depends on available alternatives, particularly interest rates. Buffett preferred stocks to the S&P index alternatives of 10-year or 30-year United States Treasuries at the time, although he found entire businesses difficult to buy attractively. He warns that significantly higher government bond yields could make stocks purchased at current prices look less appealing.