Transcription
We are here in Omaha, Nebraska this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just released his 55th annual shareholder letter to uh to the shareholders over this weekend. And this is actually the 13th year that we are now in Omaha talking to him after that letter. This is a show that we call Ask Warren so that people can write in their own questions to Mr. Buffett after they've read that shareholder's letter. Um, but obviously this morning, given the news, there are a lot of other questions that people have concerning the stock market. Um, let's jump right into it with Mr. Buffett, who is here with us right now. And, uh, Warren, thank you for being here today. It's good to see you.
>> Thanks for having me.
>> Uh, want to talk about the letter. Obviously, one of the things that you touch on in the level on the letter is when people should be buying stocks. We're going to 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 want to hear from you are your thoughts on what's happening with the coronavirus, if this is a reason to panic and if you are worried about this.
Well, I I I don't know have any special thoughts beyond the news on the coronavirus. Uh, the very first day I bought stocks was March 12th, 1941. 40 402 and uh, 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%. uh uh if you're buying a business uh and and that's what stocks are, businesses, in fact, people will be better off if they say, "I bought a business today, not a stock today." Because that gives you a different perspective on it. And presumably, you buy a farm, if you buy a apartment, house, if you buy a business, you're going to own it for 10 or 20 or 30 years. And the real question is is has the 10 year or 20-year outlook for for American businesses changed in the last 24 hours or 48 hours? And we're going to 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. Those are businesses. And uh, you know, buy or sell your business based on on uh, on today's headlines. And uh, if it gives you a chance to buy something that you like and you can buy it even cheaper, then it's you're good luck basically.
>> Although there are a lot of people who look at the market and they say, "Look, I want to buy, but I don't want to 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 10 year span of things. But if I think that 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.
>> Well, if you think that, then you've got to you're going to get fabulously rich if you're right. [laughter] All you have to do is just keep buying in 10-day intervals and keep taking your 10-day prediction. If I knew what the market was going to do, obviously, but you you don't know. I I don't think anybody knows what the market's going to 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 going to buy, say, General Motors and it has a billion 400 million shares out, you should be able to take a yellow pad like you have 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 want to have a sheepard piece of paper since I think I know what the stock market's going to do so I know whether it'll be higher or lower and it but you don't uh you don't have that the reason
>> but if I worry that the economy is going to 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
>> I'll guarantee cars are going to slow down someday. [laughter] They uh in in in 1932, General Motors had 19,000 dealers. That's more than all the auto dealers in the United States today. There only 125 million people then, but they had 19,000 dealers. They produced uh or sold in there was one month, I think, when they sold less than a tenth of a car, right at a tenth of a car per dealer. That was a terrific time to buy General Motors. [laughter] And forget about the mark. If if you can predict the market, you don't need to read balance sheets. You don't need you don't read you don't need to read anything. 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. Uh, 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 where it was located and the contract that they had with the suppliers and [laughter] made a decision on competition. Uh, 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. Uh, but it isn't. it if if you get your money's worth in terms of future earning power over the next 10 or 20 or 30 years, you're going to 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.
>> You you made a point of that in the 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.
>> Edgar Lawrence Smith changed the world with that book. And people have forgotten all about it now. Although in the 1920s it would it became more and more gospel as the boom went on. But Edgar Lord Smith set out to write a book on bonds versus stocks. and he said if he went in with the idea that bonds would be a better investment in times of deflation and stocks would be a better uh 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 think Darwin said if you found evidence that was contrary to what you already believed write it down in 30 minutes or your bl 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%, the bond yields 4%, which was 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. Uh, we don't get rich on our dividends that we receive all the way happy to receive them. We get rich on on on the fact that the retained earnings are used to build new earning power repurchased uh shares which increases your ownership in the company and and uh uh and and Berkshire has retained earnings ever since we started. That's the only reason Berkshire is worth a lot more as we retain earnings. [snorts]
>> That that 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.
>> Well, that that is true because you can get my old boss Ben Graham told me very early on, you get 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 at some 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 going to 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 uh perception on his part had experienced changing conditions but people just looked they got their confirmation through stock prices.