Anytime Warren Buffett does a deal for Berkshire, he makes the rounds on business news. This week he made a deal and sat for the usual interview with CNBC (video and transcript linked below).
These interviews can be hit or miss sometimes because they want his perspective on everything. But two things stood out: the certainty of gravity and taxes.
The first is something he’s asked every time and fits with the last post. Interest rates act like gravity on asset prices.
But because interest rates have stayed low for so long, it becomes easier to ignore the risks interest rates pose. The longer things stay the same, the more investors expect it to continue:
Well, the valuations make sense with interest rates where they are. I mean, in the end, you measure laying out money for an asset in relation to what you’re going to get back. And the number one yardstick is U.S. governments. And when you get 230 on the 10 year, I think stocks will do considerably better than that. So if I have a choice of the two, I’m gonna take stocks at that point. On the other hand, if interest rates were — on the 10 year were five or six, you would have a whole different valuation standard for stocks. And we’ve talked about that, you know, for some time now.
Yeah, interest rates are gravity. If we knew interest rates were gonna be zero from now till judgment day, you know, you could pay a lotta money for any other asset. You would not want to put your money on a zero. And I would have thought back in nineteen– I mean, 2009 that rates would not be this low eight years later. But it’s been a powerful factor. And the longer it persists, the more people start thinking in terms of something close to the rates they’ve seen for a long time. So, the one thing I’m sure of is that– over time– stocks from this level will beat bonds from this level… And the question is: Which variable is gonna change? And everybody expects interest rates to change, but they’ve been expecting it quite a while.
I think they expect ’em to increase. But the question is how much. I mean, if three years from now interest rates are 100 basis points higher, then the stocks will still look cheap at these prices. If they’re 300 or 400 basis points, they won’t look cheap.
The question everyone wants to know is when/if rates move higher, how much and how fast do they move? I have no idea. I do know that I don’t want to be overexposed to it at current market valuation when we find out.
Even if you don’t believe rates won’t change much anytime soon it’s important to not overlook other risks. Any number of other factors can cause prices to fall, without rates changing. Having some protection is always a good idea as market valuations rise.
The second thing is something everyone should be thinking about since there are only three months left to the year. The possibility of a tax cut next year could impact capital gains taxes. The thought process is to take capital losses this year as you usually would on anything you want to sell.
However, you should defer taking capital gains until next year just in case the capital gains tax is lowered. The capital gains tax is another transaction cost. The chance of possibly lower that cost on things you would be selling today, by waiting three months, seem like a smart idea.
The broader implications of this, which Buffett alludes to, is if enough investors do this, the worst performing stocks would sell off (potential opportunities), while the better performers would see less selling.
It’s worth thinking about for early tax planning.
Quick Tip: If you ever watch these videos in a Chrome browser, grab the Video Speed Controller Extension. It lets you adjust the speed of the video, just like listening to a podcast at 1.5x or 2x speed.
- Why Do Smart People Do Foolish Things? – Scientific American
- The Shallow Benefit of Deep Liquidity – M. Housel
- Remembering Black Monday – J. Zweig
- Picking Stocks Is Hard. It’s Harder With Growth. – N. Kaissar
- How Family-Owned Companies Outperform in Every Sector – CNBC, Credit Suisse Report
- 22 Timeless Lessons for Our 22nd Month – Yet Another Value Blog
- Loops of Progress, or How Modern Are You? – Farnam Street
- The Triage of Truth – Aeon
- The Seven Deadly Sins of AI Predictions – MIT Tech Review
- How the Elderly Lose Their Rights – New Yorker