I wanna talk about the letter--
obviously one of the things that you touch on
the level-- on the letter is
when people should be buying stocks.
We’re gonna dig into a lot of it.
But when you’re looking at the futures down about
818 points this morning,
I think probably the first thing
viewers wanna hear from you are your thoughts on what’s
happening with the Coronavirus,
if this is a reason to panic and
if you were worried about this.
WARREN BUFFETT: Well,
I--
I don’t know if I have any special thoughts beyond the news
on the Coronavirus.
The very first day I bought stocks was March 12th, 1941 ’42.
And--
the stocks were down about 2% that day
as it turned out.
Unfortunately I bought in the morning.
So when I came home in the evening and
my dad told me the execution price it was down 2%.
If you’re buying a business--
and-- that’s what stocks are, businesses, in fact,
people would be better off if they say,
“I bought a business today,”
not a stock today because that gives you a
different perspective on it
than presumably good and buy a farm,
if you buy an apartment, a house,
if you buy a business you’re gonna own it for
ten or 20 or 30 years.
And the real question is is has the ten-year or 20-year outlook
for American businesses changed in the last
24 hours or 48 hours? And we’re gonna--
you’ll notice many of the businesses we own
-- partially own,
American Express, we’ve owned it for 20 years,
Coca-Cola, we’ve owned it for 40 years--
but those are businesses.
And—
you don’t buy or sell your business based on
-- on--
today’s headlines.
And--
if it gives you a chance to buy something that you like
and you can buy it even cheaper than it’s--
you’re in good luck basically.
BECKY QUICK: Although there are a lotta people who look
at the market and say,
“Look, I wanna buy
but I don’t wanna buy when the market’s sitting at new highs,
when it’s been hitting new records every day.
Maybe it’s off 800 points this morning
but maybe there’s more of a decline to come because
the effect of the Coronavirus is
going to be an impact on the global economy.”
IMF said that over the weekend.
You are going to see weakness as
not only China but other countries try and address this.
You’re right,
it may not change things over the five
or ten-year span of things.
But if I think I can buy something
for potentially 10% cheaper,
maybe more than that if I wait a week or a month,
maybe that’s what I’m sitting around--
WARREN BUFFETT: Well, if you think that then
you gotta-- you’re gonna get fabulously rich if you’re right.
All you have to do is just keeping
buying in ten-day intervals and keep making your ten-day prediction.
If I knew what the market was gonna do obviously.
But you-- don’t--
I don’t think anybody knows what the market’s gonna do.
I think you know-- do know
whether you’re making an intelligent purchase at a given price.
Everybody when they buy a stock,
if you’re gonna buy,
say, General Motors that has a billion--
400 million shares out,
you should be able to take a yellow pad like-- there and
on one page say--
let’s say it’s selling for 30.
It isn’t selling that low but that’d be $42 billion.
You should say,
“I am buying the General Motors company for $42 billion because--”
and you should get it on a piece of paper.
And then if you wanna have a separate piece of paper that says,
“I think I know what the stock market’s gonna do
so I know whether it’ll be higher or
lower in a week,” but you don’t.
You don’t have that--
BECKY QUICK: You don’t but if I worry that the economy is gonna slow down,
not just for the quarter
but for the year that would impact how many cars
I think they might be able to sell or even produce.
WARREN BUFFETT: I guarantee you cars are gonna slow down some day.
They--
and--
in 1932 General Motors
had 19,000 dealers.
That’s more than all the auto dealers in the United States today.
There are only 125 million people.
But they had 19,000 dealers.
They produced--
or sold and--
there was one month
I think when they sold less 1/10 of a car
or right at a 1/10 of a car per dealer.
That was a terrific time to buy General Motors.
And--
forget about the market,
if you can predict the market,
you know,
you don’t even have to read balance sheets.
You don’t-- you don’t even need--
you don’t even read any--
you certainly can’t predict the market by reading
the daily newspaper. That is for sure.
And you really can’t--
you certainly can’t
predict the market by listening to me.
But you’re buying businesses.
And
if you plan to buy a local service station
yesterday
and it was closing today
I don’t think you’d tear your hair out or anything like that.
You’d have already looked at it where it was located,
the contract that they had with the
suppliers and made a decision on competition.
People--
because they can make decisions every second in stocks,
whereas they can’t with farms,
they think an investment in stocks is different
than an investment in a business
or an investment in a farm
or investment in an apartment house.
But it isn’t.
If--- you get your money’s worth
in terms of future earning power
over the next ten or 20 or 30 years
you’re gonna have made a good investment.
And you can’t pick them from day to day.
If you can do that you can, well,
I haven’t met anybody yet that--
that knows how to do it.
BECKY QUICK: You-- made a point of that in a letter this year where you--
highlighted a book that was written by Edgar Lawrence Smith
back in 1924.
And you said until he came along
nobody really realized the compound interest effect
of buying stocks.
Not just buying businesses but buying stocks themselves.
WARREN BUFFETT: Edgar Lawrence Smith changed the world with that book.
And people have forgotten all about it now.
Although in the 1920s it became more and more gospel
as the boom went on.
But Edgar Lawrence Smith
set out to write a book on bonds versus stocks.
And he said--
he went in with the idea
that bonds would be a better investment
in times of deflation and stocks would be a better--
investment in times of inflation.
And
the first line of his book was to say that he’d been wrong.
But he had enough sense to look at his evidence.
And, I mean,
I think Darwin said if you found evidence
that was contrary to what you already believed
write it down in 30 minutes or
your mind will just block it out.
I mean,
people have a great resistance to new evidence.
And he said,
“If a stock yields 4% a bond yields 4%,”
which is what he was talking about then,
“The stock was going to outperform the bonds
because there were retained earnings that we’re building beyond that yield.”
And that’s--
that has been true for a long,
long time but nobody paid any attention to it.
We don’t get rich on our dividends that we receive.
While we happy to receive them.
We get rich on--
the fact that the retained earnings are used
to build new earning power,
repurchase--
shares which increases your ownership in the
company. And-
Berkshire has retained earnings ever since we started.
That’s the only reason Berkshire is worth a lot more
as we retain earnings.
BECKY QUICK: That--
led Keynes to actually say that this was an important book.
People paid attention to it.
But you’re right,
it added to the frenzy that built up to 1929.
WARREN BUFFETT: Well, that is true because
you can get--
an old boss Ben Graham told me very early on,
“You can get in more trouble with a good idea than a bad idea,”
because
the good idea works.
I mean, it’s a good idea to buy a home, for example.
And then people go crazy sometimes.
A good idea works and it works and it works.
Stocks work out better than bonds most of the time.
And after a while,
people forget that there were some other limiting conditions.
With Edgar Lawrence Smith’s
book it was that when bonds yield the same as stocks,
which was the case then,
that stocks are gonna outperform
because they have this retained earnings.
So stocks started going up in the ’20s.
And all of a sudden they were selling at
five or six times the prices as when he bought the book.
And the original correct--
perception on his part
had experienced changing conditions.
But people just looked
-- they--
they got their confirmations for the stock price.
And that’s what happens in bull markets.
People-- start out thinking stocks are cheap
and then they start thinking stocks have gone up.
And--
a stock can be a good buy or a bad buy.
A bond can be a good buy or a bad buy.
It depends on price.
BECKY QUICK: And-- but that leads us to today.
I mean, if his premise was that stocks are always going to be a better--
a better investment than bonds
that’s kinda what you hear today which
we’ve been hearing for a while is TINA,
there is no alternative. Right?
You have to buy stocks because bond yields are so low
because interest rates are so low.
WARREN BUFFETT: Well,
if you look at the present situation,
we’ve talked about this before,
that you get more for your money in stocks than bonds.
That doesn’t have to be the case.
I mean--
but it’s usually been in the case in America.
Very usually been the case.
And--
if you buy a
30-year bond today with yield 2%
you’re paying 50 times earnings
for an investment where the earnings can’t go up for 30 years.
Now if somebody said to you,
“I wanna sell you a stock that’s at 50 times earnings.
The earnings can’t go up for 30 years,”
you’d say that doesn’t sound very good.
Stocks are way better than 30-year bonds.
I mean, it’s-- that’s clear.
And--that’s one of the alternatives people h--
people really have three basic alternatives,
short-term cash which is an option of doing something later on,
long-time bonds or-- long-term stocks.
And stocks are cheaper than bonds.
BECKY QUICK: Charlie said recently--
Charlie Munger, vice chairman at Berkshire Hathaway
had his daily journal meeting just a couple weeks ago.
And at that meeting he said that
there’s a lot of wretched excess out there
and that there’s a lot of trouble coming as a result.
Do you agree with that?
WARREN BUFFETT: There’s always trouble coming.
You know,
there was trouble coming in 1942 when I bought that first stock.
All kinds of trouble.
Phillipines were gonna fall pretty soon.
There’s all kinds of trouble in 1949.
There was trouble--
certainly trouble in 2008 when I wrote
an article for The New York Times.
I said,
“Trouble is coming.” But I said, “Buy stocks.”
BECKY QUICK: Would you repeat that this time,
if trouble’s coming would you still say buy stocks right now?
WARREN BUFFETT: I would say buy stocks if you get enough for your money.
You know, we buy a few stocks.
But
we don’t look at--
we’re not buying the stock market.
We’re saying I am buying--
say American Express. We own American Express.
There’s 815 million shares out.
And sells at--
this morning it was $126 or something like that.
So it’s selling for roughly $100 billion.
Now the real question is
whether the company’s worth or more less than $100 billion.
It isn’t what the stock is gonna do tomorrow or next week
or next month.
BECKY QUICK: You said--
just a few minutes ago when we asked you on worldwide exchange,
right now Berkshire Hathaway is a net buyer of stocks.
You are in a net buying position?
WARREN BUFFETT: We’ve been a net buyer of stocks
-- or I’ve b--
actually been a personal net buyer of stocks
ever since I was 11, every year.
And--
there’s been 15 American presidents
in my lifetime, more than 1/3.
I’ve lived under 1/3 of the
I didn’t buy stocks under Hoover.
I was only about six months old then.
But there’ve been seven Republicans after that
and seven Democrats.
I bought stocks under every one of ’em.
Now I haven’t bought stocks every day.
There’ve been a few times I’ve bought stocks where--
were really quite high.
And
I’ve even written an article once or twice.
But that’s very seldom.
BECKY QUICK: But you wrapped up your partnership at one point too.
WARREN BUFFETT: I wrapped up my partnership once because of that.
BECKY QUICK: Because you thought it was too expensive.
WARREN BUFFETT: Yeah.
BECKY QUICK: Okay. But this is not a time like that?
WARREN BUFFETT: We own $240 billion worth of stocks now.
We look at that as $240 billion worth of businesses--
that we own parts of.
But--
I love owning those businesses.
BECKY QUICK: You’ve also got more than $125 billion
in cash sitting around.
WARREN BUFFETT: Yeah, well, that’s--
we’d like to buy more businesses.