There was no digital confetti, and no free stock for joining either. Nevertheless, the Warren Buffett and Charlie Munger show out in Los Angeles proved to be good theatre—filled with wit and wisdom from two of the world’s most successful investors.
The occasion was the Berkshire Hathaway Inc. annual meeting—a virtual affair this year—and Buffett, 90, and Munger, his 97-year-old longtime business partner, set out to be voices of reason and sanity in an investment landscape looking more surreal by the day (SPACs, anyone? Maybe with an NFT thrown in?).
Here are some of the takeaways from Saturday’s event that apply to the investing world and beyond.
Mega-cap tech stock valuations are not “crazy.” The reason: Incredibly low rates on short-term government debt, or Treasuries—which are “the risk-free yardstick against which other values are measured,” said Buffett.
“Interest rates basically are to the value of assets what gravity is to matter”—and the rate on short-term Treasuries is really nothing today, the Berkshire Hathaway chairman said.
If Treasury rates are really supposed to be this low, those high-flying tech shares are a bargain, Buffett said (and that is one big “if”). That view contrasts with the prevailing wisdom in the market, which is that tech-stock valuations are extreme.
“The Googles and Apples are incredible in terms of what they earn on capital,” Buffett said. “They don’t require a lot of capital, and they gush out more money.”
Successful stock-picking is actually quite hard. Buffett put up a slide of the 20 stocks from around the world with the largest market capitalizations. Five of the six were U.S. companies—Apple Inc. at the top, at about $2 trillion, with Microsoft Corp., Amazon.com Inc., Google parent Alphabet Inc. and Facebook Inc. holding the No. 3, 4, 5 and 6 slots. (No. 2 was Saudi Aramco.)
Then Buffett asked the audience to think about how many of those companies they would expect to be around in 30 years—maybe five, maybe eight? Then he showed a slide with the same information—but from 30 years ago. None of the stocks from the 2021 slide were on it.
“I would guess that very few of you would have said zero, and I don’t think it will be, but it’s a reminder of what extraordinary things can happen,” he said. “The world can change in very dramatic ways.”
Even if you understand the promise of an industry—like the birth of the automobile—you need to choose the winner in that industry. “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future,” said Buffett. “I do not think the average person can pick stocks.”
Beware appeals to your gambling instinct: “American corporations have turned out to be a wonderful place for people to put and save their money but they also make terrific gambling chips,” Buffett said.
He suspects that a lot of the short-term options trading in Apple’s stock comes from young traders on Robinhood, the popular trading app that’s drawn millions of rookie investors. Buffett isn’t saying gambling itself is shameful—he called it a “very human instinct”—but he said “I don’t think you’d build a society around doing it.”
As more people enter the casino than leave it, “it creates its own reality for a while and nobody tells you when the clock is going to strike 12 and it all turns to pumpkins and mice,” he said.
Index funds are the answer for most investors. The fact that it’s so hard to predict what kind of tremendous change there will be in the world is a great argument for diversified index funds, Buffett said.
The billionaire has advised the trustee of his will that when he passes, 90% of his bequest to his wife—now in Berkshire stock—should be in a stock index fund like the S&P 500, and 10% in Treasury bills.