Warren Buffett: The Coronavirus Shouldn't Change Your Investment Strategy | Feb 24, 2020 | Summary and Q&A

Summary

Warren Buffett's annual letter to Berkshire Hathaway shareholders addresses various topics including the company's investment strategy, lack of major acquisitions, and succession planning. In a discussion with CNBC's Becky Quick, Buffett shares his views on the current market situation, the impact of the coronavirus, and the importance of long-term investing. He also mentions key insights from Edgar Lawrence Smith's book on stocks and bonds and highlights the benefits of buying businesses instead of focusing solely on stock prices.

Questions & Answers

Q: What does Warren Buffett think about the recent market decline?

Buffett sees the market decline as an opportunity to buy stocks at lower prices, which is favorable for a net buyer of stocks like Berkshire Hathaway. He emphasizes the importance of buying stocks for their long-term earning potential and encourages investors to focus on the value of businesses rather than daily stock market fluctuations. Buffett believes that most individuals, as savers and net buyers of stocks, should be hoping for lower stock prices.

Q: How does Warren Buffett assess the impact of the coronavirus on the global economy?

Buffett does not have any special thoughts beyond the news on the coronavirus. He refers to his experience during World War II when he first bought stocks, highlighting that market conditions have always had periods of uncertainty. Buffett takes a long-term perspective and focuses on the fundamentals of businesses. He assesses the impact of the virus on specific Berkshire Hathaway holdings, such as Dairy Queen franchises in China and Apple, which has experienced disruptions in its supply chain.

Q: How does Warren Buffett determine when to buy stocks?

Buffett's approach is to view stocks as businesses and make purchase decisions based on the fundamental value of those businesses. He compares buying stocks to buying a farm or an apartment house, where the real question is whether the 10- to 20-year outlook for the business has changed rather than short-term market fluctuations. Buffett encourages investors to think of themselves as business owners and consider the earning power of the business over the long term.

Q: Are lower stock prices a reason for concern for Warren Buffett?

Buffett sees lower stock prices as a good opportunity for net buyers of stocks. He explains that as a long-term investor, he prefers to buy stocks at lower prices rather than higher prices. Buffett mentions that most investors, especially savers, should want stock prices to go down because that allows them to buy at a lower cost. He emphasizes that the focus should be on the value of the business for long-term investment success.

Q: How does Warren Buffett assess the current state of the U.S. economy?

Buffett describes the U.S. economy as strong but slightly softer compared to six months earlier. He points out that certain businesses, such as those affected by tariffs, experience fluctuations due to various factors including supply and demand, competition, and external conditions. Buffett highlights the difficulty of predicting short-term economic trends or making investment decisions based on them. However, he believes that over the long term, American businesses will perform well.

Q: Why did Warren Buffett sell some of Berkshire Hathaway's shares of Wells Fargo?

Buffett does not provide specific advice on individual stocks, including Wells Fargo. He explains that they sold down their position for reasons such as avoiding being over 10% ownership, which would require filings with the Federal Reserve. While he does not go into detail, he indicates that Berkshire Hathaway has reduced its stake in Wells Fargo beyond the regulatory threshold.

Q: How do zero interest rates in regions like Japan and Europe impact their banks and the U.S. banks like JPMorgan?

Buffett acknowledges that low interest rates worldwide have made it challenging for banks to generate higher returns on equity, particularly for banks in countries such as the UK, Europe, and Japan. He points out that American banks have fared relatively better with low interest rates but emphasizes that banks make more money when rates are higher and the yield curve is steeper. Buffett does not provide specific opinions on individual banks.

Q: What is the impact of low interest rates on insurance companies?

Buffett explains that low interest rates are detrimental to insurance companies, especially those that have guaranteed returns on policies such as life or annuity companies. These companies may struggle to generate adequate returns on their investments in a low-rate environment. However, Buffett advises insurance companies to adjust their promised returns to match the prevailing interest rates rather than engage in riskier investments to chase higher yields.

Q: How are insurance companies affected by reaching for yield in a low-rate environment?

Buffett acknowledges that many individuals and companies are reaching for yield due to low interest rates. However, he cautions against the temptation to pursue riskier investments to achieve higher returns. This behavior is not advisable because it can result in negative consequences over time. Buffett emphasizes the importance of adapting one's consumption to match their income and advises against making hasty investment decisions based on the desire for higher yields.

Q: Does Buffett believe that conglomerates are undervalued in the market?

Buffett acknowledges that conglomerates have had a bad reputation due to past abuses and manipulations in the late 1960s. However, he believes that Berkshire Hathaway is undervalued by the market due to the conglomerate discount. While some argue that conglomerates should be broken up, Buffett does not agree with this perspective and is confident in the long-term value of Berkshire Hathaway.

Q: Is Berkshire Hathaway planning to buy stocks amid the market decline?

Buffett indicates that Berkshire Hathaway will not be selling stocks and may consider buying stocks during the market decline. He reiterates his preference for buying stocks at lower prices, emphasizing that investors should focus on the value of businesses and take advantage of buying opportunities when prices are discounted.

Takeaways

Warren Buffett's annual letter to Berkshire Hathaway shareholders covers a range of topics, including market conditions, the impact of the coronavirus, and long-term investing. He highlights the importance of buying stocks as businesses and advises against focusing on short-term market fluctuations. Buffett believes that American businesses will perform well over the long term but cautions against reaching for yield or making investment decisions based solely on low interest rates. Despite criticisms of conglomerates, he believes that Berkshire Hathaway is undervalued and rejects the idea of breaking it up. Overall, Buffett's approach emphasizes the value of businesses and a long-term investment horizon.