Buffett sat with CNBC for an interview this past Monday. The Q&A gives Buffett a chance to elaborate on topics he touched upon in the annual letter and answer other questions as well: healthcare, airlines, Apple, etc.
Almost all of his comments are things he’s said before. He offered a few details on the new healthcare partnership with Amazon and JP Morgan. The healthcare industry incentivizes advancing research and medical breakthroughs, not lowering costs. It’s in desperate need of cost improvements, so it will be interesting to see how that plays out.
Two other parts stood out as well.
The first is something Buffett learned from Graham decades ago. Stocks are pieces of businesses.
It’s obvious, but I think it gets lost in the expanding universe of mutual and index fund choices. Too many of these funds use fancy names, categories, and returns that distract from the businesses held. The businesses drive the returns. The rest is marketing.
The second is another thing Graham preached. Mr. Market can bring out the worst in people. The tendency to gamble, the need to get rich quick, and take unnecessary risks are part of human nature. Wall Street knows it and creates products to lure the gambler in all of us.
Some people deal with it better than others. And some people aren’t cut out for it at all. Here’s Buffett:
Well, if you own stocks like you’d own a farm or an apartment house, you don’t get a quote on those every day or every week – you look at the business. And the value of American business depends on how much it delivers in cash to its holders over between now and judgment day. And I don’t think it changes in 10% in a two month period if you’re looking at it as a business. Now, you’ve got – anything can happen in markets. I mean, anything can happen in markets. And that’s why I say don’t ever borrow money against securities. Markets don’t have to open tomorrow. I mean, you can have extraordinary events. So I think to some extent, you can get some of the instruments that people don’t understand very well that have a lot of fire power in them.
They can trigger and – yeah. The idea of people taking a position and they’re gambling. They’re not investing. Nobody’s investing when they buy, you know, some super charged index on, you know, how the VIX does or something like that. They don’t need it in their – it’s an unnecessary instrument. Now, you know, they will create instruments that the public will buy. And you can just count on that. Wall Street’s been doing that for – since they met under the buttonwood tree in 1792 or whatever it was on the exchange. But if you’re investing, if I’m going to buy a half interest in a McDonald’s stand and you’re going to run it, or a McDonald’s franchise, you’re going to run it, I look to the business to determine whether I’ve made a good investment. And I’m concerned about, you know, whether we have new competition, how we do over the years. But it’s the business I look at. When you’re just looking at the price of something, you’re not investing. I mean, if you buy something, Bitcoin for example, or some cryptocurrency, you’re not looking to the asset itself to produce anything. If you buy an apartment house, you’re looking at how the apartment house does. You buy a farm, you look how the farm does. If you buy a whole business, you’re looking at how the business does. If you buy a part of a business, why shouldn’t you look at how the business is going to do. People get charmed by lots of action and the fact that things are liquid and all of that. And it does have repercussions back into the market. When you get something like, you know, ETN arrangement on the, you know, super charged on the VIX, I mean, where you can lose 90% of your money in one day, I mean, that really doesn’t belong with the word, “Investment.” I mean, it’s just a gambling form of activity.
And people – if they just think of stocks as pieces of business, they’d be so much better off than thinking of those little things that move around in price.
But some people are not actually emotionally or psychologically fit to own stocks. But I think more of them would be if you get educated on what you’re really buying, which is part of a business. And the longer you hold stocks, the less risky they become, whereas the longer the maturity of a bond, the more risky it becomes.
It’s not easy psychologically for many people. But I’ve been teaching since I was 21. I taught my first class on investments, and I had a class last week with 11 schools, 220 students. And some of them get it and some of them don’t. Now, people would rather gamble. I mean, the idea that you can double your money in six months, that’s just going to – it’s why people go to the races, why they go to Vegas. You know, whatever it may be. They even know the odds are against them. And they still do it. I mean, it’s a strong instinct to want to get rich fast. And I don’t know how to do it.
The transcript is worth a read. Just be aware, there’s a lot of pointless banter to wade through.
- Obvious Things That Easily Escape Attention – M. Housel
- Delighting in Sacrifice – S. Godin
- Good Job! – Epsilon Theory
- Rational Irrational Exuberance? – Project Syndicate
- Redefining Wrong in Poker, Politics, and Beyond – Behavioral Scientist
- Distinction Bias: Why You Make Terrible Life Choices – Nir & Far
- The Law of Unintended Consequences: Shakespeare, Cobra Breeding, and a Tower in Pisa – Farnam Street
- The End of the Low Volatility Regime – 13D Research
- When the Stock Market Rises, Who Benefits? – St. Louis Fed
- Private Equity Returns in Public Markets, w/ Dan Rasmussen (podcast) – Invest Like the Best
- Mother of Invention – 1843 Mag
- The Simple Algorithm That Ants Use to Build Bridges – Quanta Magazine