Warren Buffett On Apple, Airlines, Trump & Berkshire's Cash Pile | February 27, 2017

TL;DR

Warren Buffett says investors should not stay out of stocks merely because they think they can find a better entry point. He recommends buying a diversified group consistently over time and judging valuations against interest rates, which he describes as acting like gravity on asset prices. He also argues that American dynamism has endured through war, the 2008 panic, and other economic setbacks. Read on for his specific investing principles and market assessment.

Transcript

warren buffett is with us in omaha to this morning at the nebraska furniture mart warren this is 10 years now that we've been doing the ask warren show where you've let us come out bring questions from viewers along with us we want to thank you for that and for taking the time to be with us once again this morning it's always been fun it has always... Read More

Key Insights

• 😑 Buffett believes in the resilience of the US economy and expresses optimism about its future growth.
• 👮 He emphasizes the importance of the market system and rule of law in driving economic progress.
• 🍉 Buffett recognizes that market valuations fluctuate and advises investors to consider long-term potential rather than short-term market movements.
• 💪 He highlights the stickiness of Apple products and their strong consumer following.

Questions & Answers

Q: What does Warren Buffett say to investors who think it is too late to enter the stock market?

Buffett says neither they nor he can know the best time to enter. Staying out of a game expected to perform well over a lifetime because one hopes to choose a better entry point is, in his view, a terrible mistake.

Q: How does Warren Buffett recommend investing in stocks over time?

He recommends buying stocks consistently over time, this month, next month, and in subsequent years. Investors should also spread company-specific risk by owning a diversified group of stocks.

Q: Does Warren Buffett believe investors can successfully time the market?

No. Buffett says he does not know anyone who has timed markets successfully over the years, although many people thought they could.

Q: Were stocks in bubble territory when Warren Buffett gave this interview?

Buffett said stocks were not in bubble territory at that time. He added that their valuation had to be measured against prevailing interest rates.

Q: How do interest rates affect stock and asset valuations according to Warren Buffett?

Buffett says interest rates act like gravity on valuations: higher rates pull asset values down. He notes that if rates were 7% or 8%, the market prices discussed would look exceptionally high.

Q: Why did Buffett say stocks looked cheap relative to historical valuations?

Measured against the interest rates prevailing at the time, Buffett said stocks were on the cheap side compared with historical valuations. The key risk was that interest rates could rise substantially and bring stock prices down.

Q: What did Buffett say would happen if the 10-year rate stayed at 2.30 for 10 years?

He said investors would greatly regret not buying stocks at the time if the 10-year rate remained at 2.30 for 10 years. His point was that the attractiveness of stock prices depends heavily on the interest-rate environment.

Q: Why does Warren Buffett emphasize American dynamism in his shareholder letter?

Buffett calls it the dominant theme of his life since he bought his first stock in the spring of 1942 at age 11. He says the country has repeatedly recovered from setbacks, including war and the panic of 2008, and has not lost its “secret sauce.”

Summary

In this video, Warren Buffett discusses various topics including his annual letter, the American economy, the stock market, and his recent investments in Apple and the airline industry. He emphasizes the strength and resilience of the American economy, encourages long-term investment in the stock market, and explains his rationale behind his investment decisions. Buffett also touches on the factors that have contributed to America's success and the dynamics of the airline industry.

Questions & Answers

Q: Why did Buffett choose to highlight the American dynamism in his letter?

Buffett believes that the American dynamism has been a dominant theme throughout his life and has played a significant role in the success of the country. He highlights it in his letter because it has been a driving force behind his investment decisions and he wants to emphasize its importance to others as well.

Q: What would Buffett say to someone who is hesitant to invest in the stock market?

Buffett advises against trying to time the market and emphasizes the importance of staying in the game for the long term. He believes that consistently investing in a diversified portfolio of stocks over time is the best strategy. He also compares the potential returns of stocks to other investment options like bonds, highlighting the advantages of owning equities.

Q: Is Buffett concerned about the current high levels of the stock market?

Buffett acknowledges that stock market valuations may seem high compared to historic levels, but he believes that they need to be measured against interest rates. As long as interest rates remain low, stocks can still be considered cheap. However, he acknowledges that a significant increase in interest rates could pose a risk to stock prices.

Q: Has Buffett changed his views on the stock market since the financial crisis of 2008?

Buffett has been cautious about the stock market since the fall of 2008, but he acknowledges that timing the market is challenging. He believes that it is impossible to predict short-term market movements, but over the long term, stocks have the potential to provide significant returns. Buffett also highlights the importance of buying stocks consistently over time.

Q: Why did Buffett invest heavily in Apple and the airline industry?

Buffett explains that his investments are based on his analysis of individual companies rather than macroeconomic factors like interest rates or political events. He chose to invest in Apple because he believes in its product and sees it as a consumer-driven business with a loyal customer base. As for the airlines, Buffett was attracted to their share buybacks and the potential for sustained profitability.

Q: How does Buffett assess valuation and potential future growth of Apple?

Buffett considers Apple's future earning power as the key determinant of valuation. He praises CEO Tim Cook's capital deployment strategies and the stickiness of Apple's products in consumers' lives. Buffett also mentions that the increased buybacks of the company's shares could lead to higher returns on a per-share basis.

Q: What are the risks associated with investing in airlines?

Buffett acknowledges that the airline industry is a tough business due to its low cost of adding seats and high fixed costs. He mentions that aggressive pricing and excessive capacity can lead to financial challenges for airlines. However, he also appreciates the buyback programs that many airlines have implemented and believes that they have potential for future profitability.

Q: Does Buffett communicate or influence the management of the airlines he invests in?

Buffett does not have direct communication with the CEOs of the airlines he invests in. He states that index funds own a significant percentage of these companies, and his investment decisions are based on analysis rather than trying to influence management.

Q: Why did Buffett sell his preferred shares in Dow Chemical?

Buffett explains that they sold the preferred shares in Dow Chemical because they wanted to avoid holding the common stock. They timed their sales to coincide with the conversion price of the preferred shares. It was a cautious approach to ensure that they did not end up with a significant position in the common stock, which they did not want to own.

Q: Does Buffett have any regrets about past investment decisions?

Buffett does not recall any specific instances where he changed his mind about a stock and sold it before it could show up on a 13F filing. Although it might have happened occasionally, it is not a common occurrence for him. He emphasizes the importance of long-term investing and staying committed to principled decisions.

Takeaways

Warren Buffett discusses the American dynamism, encourages long-term investing in the stock market, and shares insights into his investment strategies. He emphasizes the importance of buying stocks consistently over time and highlights the positive aspects of companies like Apple and the airlines. Buffett also sheds light on the complexities and risks associated with investing in the airline industry. Overall, he emphasizes the need for a rational and patient approach to investing.

Summary & Key Takeaways

• Warren Buffett discusses his annual letter to shareholders, highlighting the theme of American dynamism and the resilience of the US economy.

• He advises against trying to time the market and emphasizes the importance of investing consistently over time.

• Buffett believes that interest rates and market valuations should be considered when making investment decisions, but ultimately, the long-term potential of companies should drive investment choices.