The annual Woodstock for Capitalists was a somber, subdued event that was very telling when you connect the dots. For a nearly 90-year old man, his stamina and clarity of thinking is amazing. Yet, watching him, I felt like I was witnessing the end of a brilliant career.
His “bet on America” is still intact and he’ll take that to his grave. But you could see that he’s fearful and he’s hoarding cash like it’s the end of days. Our decade-long experiment with the “whatever it takes” Fed combined with this devastating pandemic has clearly unnerved him.
I read the entire transcript (download it here) and was surprised at how often he repeated himself. I don’t think it was due to failing memory, rather, I think he was trying to drive home his important points.
It seemed to me that he was trying to warn us. Trying to send us one final insight from a career that has no peer. He stands alone when you combine his investment track record, his spoken and written words, and how he has captured the imagination of the financial world for more than four decades.
Here’s my take on what Buffett was telegraphing.
1. He does not think stocks have been attractively priced for years.
His last big purchase was 2016, cash is now more than 5x what he needs for working capital, and “the option value of money” is more valuable than buying back his own stock at 20% off ATH. “We have not done anything because we don’t see anything that attractive to do.” He referenced the importance of his cash stockpile multiple times both for its value when investment opportunities arise and to protect him “from relying on the kindness of strangers” if something really bad happens in the markets and economy.
2. He can’t flat-out say how bearish he really feels.
That’s because he knows a) it would tank the market and b) it would conflict with his long-term view (>20 years) that “nothing can stop America when you get right down to it.”
3. He feels the range of outcomes in the economy and markets going forward is “extraordinarily wide.”
He said, “You can bet on America but you’re going to have to be careful about how you bet; simply because markets can do anything.” He repeatedly said how “nobody knows” what’s going to happen in the next few years and how “anything can happen” and he seemed to be saying that from a position of concern, not from his usual “nobody can predict the future so just buy stocks for the long-term and you’ll be fine.”
4. He made it very clear that his time frame for doing well in stocks is “decades.”
In reference to owning stocks, he said, “If you bet on America and sustain that position for decades, you’re going to do better than, in my view, far better than, owning Treasury securities.” And regarding buying a variety of stocks, he said, “I think I can buy a cross section and do fine over 20 to 30 years.” Yes, he’s always preached investing for the long-term, but I sensed at this meeting that he was clearly trying to set expectations really low for stock returns in the short to medium term (i.e., next 10 – 15 years).
5. While most financial advisors and money managers greatly respect Buffett, the feeling is not mutual.
He said, “And in my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part. Most good salespeople believe their own baloney.”
A little later he said, “I can tell you I haven’t changed my will and it directs that my widow would have 90% of the funds in index funds and I think it’s better advice than people are generally getting from people that are getting paid a lot to give other advice.”
And that was followed shortly by this gem: “Just have to recognize you’re dealing with an industry where it pays to be a great salesperson and it pays even better if you’re a great salesperson and you can actually produce something. But the money is in selling. There’s a lot more money in selling than in managing, actually, if you look to the essence of investment management.”
Buffett’s Final Warning
Communication experts say you save your most important point for the end because that’s what people remember. Well, after holding forth for 4 hours and 27 minutes, Buffett ended his comments on an ominous note with a tinge of hope:
I would just say again that I hope we don’t, but we may get some unpleasant surprises. We’re dealing with a virus that spreads its wings in a certain way, in very unpredictable ways. How Americans react to it. There’s all kinds of possibilities. But I definitely come to the conclusion after weighing all that sort of stuff, never bet against America.
The fact that he ended the event talking about the virus and “unpleasant surprises” and “unpredictable ways” and “all kinds of possibilities” didn’t leave me with a warm and fuzzy. I thought it was quite telling that Buffett started his talk (just 5 minutes into it) by mentioning and thanking Dr. Fauci for spending time educating him about the virus. Then he ended the talk commenting about the virus. This bookend is very symbolic.
30 Top Quotes from Warren Buffett
After reading the entire 36,728 word transcript of the May 2, 2020 Berkshire Hathaway annual stockholder’s meeting, below is my “reader’s digest” version of the presentation highlighting what I thought were some of Buffett’s most important insights in the order they appeared.
- (In reference to voluntarily shutting down large parts of the economy due to the virus): This is quite an experiment and we may know the answer to most of the questions reasonably soon, but we may not know the answers to some very important questions for many years. So it still has this enormous range of possibilities.
- I don’t believe anybody knows what the market is going to do tomorrow, next week, next month, next year. I know America is going to move forward over time, but I don’t know for sure, and we learned this on September 10th, 2001, and we learned it a few months ago in terms of the virus. Anything can happen in terms of markets, and you can bet on America, but you got to have to be careful about how you bet, simply because markets can do anything.
- You just don’t know what’s going to happen. You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time.
- But you can’t bet unless you’re willing and have an outlook to independently decide that you want to own a cross section of America, because I don’t think most people are in a position to pick single stocks; a few may be, but on balance, I think people are much better off buying a cross section of America and just forgetting about it.
- But I will tell you, if you bet on America and sustain that position for decades, you’re going to do better than, in my view, far better than owning Treasury securities or far better than following people who tell you that what the farmer’s going to yell out next… There’s huge amounts of money that people pay for advice they really don’t need and for advice where the person giving it could be very well-meaning in it and believe their own line. But the truth is that you can’t deliver superior results to everybody by just having them trade around a business.
- If you bought into a business, it’s going to deliver what the business produces. And the idea that you’re going to outsmart the person next to you, or the person advising you can outsmart the person sitting next to you is, well, it’s really the wrong approach.
- So find businesses. Get a cross section. And in my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part.
- Most good salespeople believe their own baloney. I mean, that’s part of being a good salesperson.
- Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years.
- And I don’t know the consequences of shutting down the American economy. I know eventually it will work, whatever we do. We may make mistakes. We will make mistakes, and during this talk and later on, I’m not going to be second- guessing people on this because nobody knows for sure what any alternative action would produce or anything short.
- But what we do know is that for some period, certainly during the balance of the year, but it could go on a considerable period of time, who knows, but our operating earnings will be less, considerably less than if the virus hadn’t come along.
- Fear is the most contagious disease you can imagine; it makes the virus look like a piker.
- And we’ll know the consequences of swelling the Fed’s balance sheet. You can look at the Fed’s balance sheet. They put it out every Thursday. It’s kind of interesting reading if you’re sort of a nut like me. But it’s up there on the Internet every Thursday. And you’ll see some extraordinary changes there in the last six or seven weeks. And like I say, we don’t know what the consequences of that, and nobody does exactly. And we don’t know what the consequences of what they undoubtedly will have to do. But we do know the consequences of doing nothing.
- I’m not recommending that people buy stocks today or tomorrow or next week or next month. I think it all depends on your circumstances, but you shouldn’t buy stocks unless you expect, in my view, you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them, the same way you would hold a farm and never look at a quote and never pay… You don’t need to pay attention to them. I mean, the main thing to do… And you’re not going to pick the bottom, and nobody else can pick it for you or anything of the sort. You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding.
- I don’t know whether today is a great day to buy stocks. I know it will work out over 20 or 30 years. I don’t know whether it’ll work out over two years at all. I have no idea whether you’ll be ahead or behind on a stock you buy on Monday morning, or the market.
- And then there are some pretty marginal companies that have also had access to money. So there is no shortage of funds at rates which we would not invest at. So we have not done anything because we don’t see anything that attractive to do.
- But who knows what happens next week or next month or next year? The Fed doesn’t know. I don’t know. And nobody knows. There’s a lot of different scenarios that can play out and under some scenarios we’ll spend a lot of money and other scenarios, we won’t.
- Berkshire will never get it in a position where it needs money. And we factor in, like I said, we factor in some things that are not ridiculously unlikely. And I’m not going to spell out scenarios because I, to some extent, you start spelling out scenarios, you may increase the chance of them happening. So it’s not something that we really want to talk about a lot, but our position will be to be to stay a Fort Knox. But we don’t need it. We don’t need a hundred and, it’s a little higher now than it was at quarter end. We don’t need 130 or 35 billion, but we need a lot of money that’s always available. And that means we own nothing but treasury bills. I mean, we’ve never owned, we never buy commercial paper. We don’t count on bank lines and a few of our subsidiaries have them, but we basically want to be in a position to get through anything. And we hope that doesn’t happen but you can’t rule out the possibility anymore than in 1929 you could rule out the possibility that you know you would be waiting until 1955, or the end of 1954, to get even. Anything can happen and we want to be prepared for anything, but we also want to do big things.
- But we do not think if you own a great many businesses that every one is destined for success. That’s why I suggest to people they buy an index fund.
- (Regarding the virus): We don’t know how long this period lasts. And nobody knows… I just think you’re dealing with a huge unknown. And I think that the degree to which it’s disturbed the world and changed habits and endangered businesses in the last couple of months indicates that you better, not be too sure of yourself about what it’ll do in the next six months or year or whatever.
- I can tell you I haven’t changed my will and it directs that my widow would have 90% of the funds in index funds and I think it’s better advice than people are generally getting from people that are getting paid a lot to give other advice. You don’t make a lot of money advising an S&P 500 index fund.
- Just have to recognize you’re dealing with an industry where it pays to be a great salesperson and it pays even better if you’re a great salesperson and you can actually produce something. But the money is in selling. There’s a lot more money in selling than in managing, actually, if you look to the essence of investment management.
- I mean the truth is that I recommend the S&P500 to people. And I happen to believe that Berkshire is about as solid as any single investment can be, in terms of earning reasonable returns over time. But, I would not want to bet my life on whether we beat the S&P 500 over the next 10 years.
- It’s hard to imagine getting a terrible result with Berkshire but, anything could happen.
- It’s remarkable what’s happened in the last 10 years. I’ve been wrong in thinking that you could really have the developments you’ve had without inflation taking hold.
- So if the world turns into a world where you can issue more and more money and have negative interest rates over time, I’d have to see it to believe it, but I’ve seen a little bit of it. I’ve been surprised. So I’ve been wrong so far. I don’t see how you can create … I would say this, if you’re going to have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple thousand years rather than just coming on it now. But we will see. It’s probably the most interesting question I’ve ever seen in that economics is can you keep doing what we’re doing now and we’ve been able to do it or the world’s been able to do it for now a dozen years or so but we may be facing a period where we’re testing that hypothesis that you can continue it with a lot more force than we’ve tested before.
- I’d love to be secretary of the treasury if I knew I could keep raising money at negative interest rates, that makes life pretty simple. We’re doing things that we really don’t know the ultimate outcome and I think in general are the right things, but I don’t think they’re without consequences and I think they could be kind of extreme consequences pushed far enough but there would be kind of extreme consequences if we didn’t do it as well.
- So don’t worry about the government defaulting. I think it’s kind of crazy incidentally, that should be said to have these limits on the debt and all of that sort of thing and then stopped government arguing about whether it’s going to increase the limits, we’re going to increase the limits on the debt. The debt isn’t going to be paid. It’s going to be refunded and anybody that thinks they’re going to bring down the national debt. I mean there’s been brief periods and I think it was the late nineties or thereabouts, when the debts come down a little bit, the country’s going to print more debt. The country is going to grow in terms of its debt paying capacity but the trick is to keep borrowing in your own currency.
- (Regarding buying back BRK stock when it was down in March): But the price has not gotten to a level or not been at a level where it really feels way better to us than other things, including the option value of money to stop up in a big, big way.
- I think we can keep the best parts of our market system and capitalism, and we can do a better job of making sure that everybody participates in the prosperity that that produces.
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