Warren Buffett is one of my investment heroes. I’ve been a shareholder of the company that he runs, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), since August 2011. On 2 May 2020, Buffett held court at the 2020 Berkshire Hathaway AGM (annual general meeting).
For many years, I’ve anticipated the AGM to hear his latest thoughts. This year was no exception for me. In fact, the 2020 Berkshire Hathaway AGM held even more importance, given the uncertainty that the global economy is currently facing because of the COVID-19 pandemic.
I got up at 4am on the morning of 3 May 2020 (I live in Singapore) to watch the live-stream of the entire event. It was surreal, seeing shots of a completely empty stadium that would in normal times hold tens of thousands of people. Moreover, the meeting did not have Charlie Munger, Buffett’s long-time sidekick. Berkshire thought that it did not make sense for Munger to fly from California to Omaha for the meeting. Instead, Greg Abel – who runs Berkshire’s non-insurance businesses – sat at the podium with Buffett.
But I wasn’t disappointed by this year’s AGM. The whole event lasted for over four hours. Buffett kicked it off with a tour-de-force presentation on the history and future of the US economy. He then tackled a whole host of questions – collated from the public and asked by CNBC host Becky Quick – together with Abel.
I thought it would be worth sharing my favourite comments from Buffett and Abel.
Betting on the future of the US
Warren Buffett: “In 2008 and 2009, our economic train went off the tracks, and there were some reasons why the road-bed was weak in terms of the banks and all of that sort of thing. But this time, we just pulled the train off the tracks and put it on the side.
And I don’t really know of any parallel of one of the most important countries in the world – the most productive, with a huge population – in effect, sidelining its economy and its workforce. And obviously and unavoidably, creating a huge amount of anxiety and changing people’s psyche and causing them to somewhat lose their bearings, in many cases understandably.
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.
But even facing that, I would like to talk to you about the economic future of the country because I remain convinced as I have. I was convinced of this in World War II, I was convinced of this during the Cuban Missile Crisis, 9/11, the financial crisis – that nothing can basically stop America. And we faced great problems in the past. We haven’t faced this exact problem. In fact, we haven’t really faced any that quite resembles this problem. But we faced tougher problems. And the American miracle, the American magic has always prevailed, and it will do so again.”
The importance of deposit insurance
Warren Buffett: “And one of the things as I look back on that period [referring to the Great Depression] – and I don’t think the economists generally like to give it that much of a point of importance – but if we had the FDIC [Federal Deposit Insurance Corporation] 10 years earlier… The FDIC started on January 1, 1934. It was part of the sweeping legislation that took place when Roosevelt came in. If we had the FDIC, we would have had a much, much different experience, I believe, in the Great Depression.
There was Smoot-Hawley – I mean, there’s all kinds of things and the margin requirements in ’29 and all of those things entered into creating a recession. But if you have over 4,000 banks fail, that’s 4,000 local experiences where people save and save and save and put their money away, and then someday, they reach for it and it’s gone. And that happens in all 48 states, and it happens to your neighbors, and it happens to your relatives. It has an effect on the psyche that’s incredible.
So one very, very, very good thing that came out of the Depression, in my view, is the FDIC. And it would have been a somewhat different world, I’m sure, if the bank failures hadn’t just rolled across this country – and with people who thought that they were savers, find out that they had nothing when they went there and there was a sign that said “Closed.”
Incidentally, the FDIC – I think very few people know this, or at least, they don’t appreciate it. But the FDIC has not cost the American taxpayer a dime. I mean its expenses have been paid, its losses have been paid, all through assessments on banks. It’s been a mutual insurance company of the banks backed by the federal government, associated with the federal government. But now it holds [US]$100 billion, and it consists of premiums that were paid in and investment income on the premium less the expenses and paying off all the losses. And think of the incredible amount of peace of mind that’s given to people that were not similarly situated when the Great Depression hit.”
The US stock market and economy’s incredible rise
Warren Buffett: “I remember 1954 because it was the best year I ever had in the stock market. And the Dow went from essentially 280 or thereabouts at the start of the year to a little over 400 at the end of the year.
And when it went to 400 – as soon as it crossed 381, that famous figure from 1929 – and this will be hard for some of you to believe, but everybody wondered: Is this 1929 all over again? And that seemed a little far-fetched because it was a different country in 1954. But that was the common question.
It actually achieved such a level of worry about whether we were about to jump off another cliff because the 381 [high] of 1929 had been exceeded that they had Senator Fulbright – Will Fulbright of Arkansas, who became very famous later in the Foreign Relations Committee. But he had set up a Banking Committee, and he called for a special investigation – if you read through it, he really was questioning whether we had built another house of cards again. And on this committee, one of the members was Prescott Bush, the father of George H. W. Bush, and grandfather of George W. Bush. It had some illustrious names.
And his committee in March of 1955, with the Dow at 405, assembled 20 of the best minds in the United States to testify as to whether we were going crazy again because the market was at 400, the Dow was at 400, and we’ve gotten in this incredible trouble before. But that was the mindset of the country. It’s incredible. We didn’t really believe America was what it was.
The reason I’m familiar with this thousand-page book that I have here – they found it last night in the library – was that I was working in New York for 1 of the 20 people who was called down to testify before Senator Fulbright. And he testified right before Bill Martin (who was running the Federal Reserve) testified and right after General Wood (who was running Sears) testified. And Bill Martin, of course, is the longest-running Chairman in the history of the Fed, and he’s the one who gave the famous quote that “The function of the Fed was to take away the punch bowls just when the party starts to get really warmed up.” But Ben Graham, my boss, sent me over to the public library in New York to gather some information, something you could do in 5 minutes with the computer now. I dug out something, and he went to testify.
And on Page 545 of this book — I knew where to look. I didn’t have to go through it all. But he had the quote, which I remember. And I remember because Ben Graham was 1 of the 3 smartest people I’ve met in my life. He was the Dean of the people in the securities business. He wrote the classic Security Analysis book in 1934. He wrote the book that changed my life, The Intelligent Investor, in 1949. He was unbelievably smart. And when he testified with the Dow at 404, he had one line in there toward the start in his written testimony. He said, “The stock market is high. Looks high. It is high, but it’s not as high as it looks.” But he said it is high.
And since that time, of course, we felt the American tailwind at full force. And the Dow is about 24,000. So you’re looking at a market today that has produced $100 for every dollar. All you did was you had to believe in America – just buy a cross section of America. You didn’t have to read the Wall Street Journal. You didn’t have to look up the price of your stock. You didn’t have to pay a lot of money in fees to anybody. You just had to believe that the American miracle was intact.
But you had this testing period between 1929 and 1954 as indicated by what happened when it got back up to 380. You had this testing period. And people – they’d lost faith to some degree. They just didn’t see the potential of what America could do. And we found that nothing can stop America when you get right down to it. And it’s been true all along. They have been interrupted. One of the scariest of scenarios was when you had a war with one group of states fighting another group of states, and it may have been tested again in the Great Depression, and it may be tested now to some degree. But in the end, the answer is never bet against America, and that in my view is true today as it was in 1789 and even was true during the Civil War and in the depths of the Depression.”
The right way to approach stocks
Warren Buffett: “Imagine for a moment that you decided to invest money now and you bought a farm. Let’s say about 160 acres, and you bought it $X per acre. And the farmer next to you has 160 identical acres – same contour, same quality of soil. So it was identical. But that farmer next door to you is a very peculiar character. Every day that farmer with the identical farm says “I’ll sell you my farm or I’ll buy your farm at a certain price,” which he would name.
Now that’s a very obliging neighbor. I mean that’s got to be a plus to have a fellow like that in the next farm. You don’t get that with farms. You get it with stocks. You want 100 shares of General Motors on Monday morning, somebody will buy your 100 shares or sell you another 100 shares at exactly the same price, and that goes on 5 days a week. But just imagine if you had a farmer doing that.
When you bought the farm, you looked at what the farm would produce. That was what went through your mind. You were saying to yourself, “I’m paying $X per acre, I think I’ll get so many bushels of corn or soybeans. On average, some years, good; some years, bad; some years, the price will be good; some years, the price will be bad; etc.” But you think about the potential of the farm.
And now you get this idiot that buys a farm next to you. And on top of that, he’s sort of manic depressive. And he drinks, maybe smokes a little pot. So his numbers just go all over the place. Now the only thing you have to do is to remember that this guy next door is there to serve you and not to instruct you. You bought the farm because you thought the farm had the potential. You don’t really need a quote on it. If you bought in with John D. Rockefeller or Andrew Carnegie, there were never any quotes, although there were quotes later on. But basically, you bought into the business.
That’s what you’re doing when you buy stocks, but you get this added advantage. You have this neighbor who you’re not obliged to listen to at all, but who is going to give you a price every day. And he’s going to have his ups and downs, and maybe he’ll name his selling price that he’ll buy at, in which case you sell if you want to; or maybe he’ll name a very low price, and you’ll buy his farm from him. But you don’t have to, and you don’t want to put yourself in a position where you have to. So stocks have this enormous inherent advantage of people yelling out prices all the time to you, and many people turn that into a disadvantage.
And of course, many people profit in one way or another from telling you that they can tell you what your neighboring farmer’s going to yell out tomorrow or next week or next month. There’s huge money in it. So people tell you that it’s important and they know and that you should pay a lot of attention to their thoughts about what price changes should be, or you tell yourself that there should be this great difference.
But the truth is if you own the businesses you liked prior to the virus arriving – it changes prices, but nobody is forcing you to sell. And if you really like the business and you like the management you’re in with, and the business hasn’t fundamentally changed – and I’ll get to that little one report on Berkshire, which I will soon, I promise – the stocks have an enormous advantage.
And you still can bet on America. But you can’t do that, 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 maybe. But on balance, I think people are much better off buying a cross section of America and just forgetting about it. If you’ve done that – if I’d done that when I got out of college, it’s all I had to do to make 100 on 1 and then collect dividends on top of it, which increased substantially over time.”
More on the right approach to stocks
Warren Buffett: “The American tailwind is marvelous. But it’s going to have interruptions and you’re not going to foresee the interruptions. And you do not want to get yourself in a position where those interruptions can affect you, either because you’re leveraged or because you’re psychologically unable to handle looking at a bunch of numbers.
If you really had a farm and you had this neighbor. And Monday, he offered you $2,000 an acre. And the next day, he offers you $1,200 an acre. And maybe the day after that, he offers you $800 an acre. Are you really going to – at $2,000 an acre when you had evaluated what the farm would produce – going to let this guy drive you into thinking “I better sell because his number keeps coming in lower all the time”? It’s a very, very, very important matter to bring the right psychological approach to owning common stocks.
But I will tell you, if you bet on America and sustain that position for decades, you’re going to do – in my view – far better than owning Treasury securities, or far better than following people who tell you what the farmer is going to yell out next. There’re huge amounts of money that people pay for advice they really don’t need. And for the person giving it, it can be very well-meaning and they 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. A business is going to deliver what the business produces. And the idea that you can outsmart the person next to you or the person advising you can outsmart the person sitting next to you – well, it’s really the wrong approach.”
Even more on the right way to approach stocks
Warren Buffett: “I’m 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 think that’s kind of an optimistic viewpoint. But I hope that really, everybody would buy stocks with the idea that they’re buying partnerships and businesses and they wouldn’t look at them as chips to move around up or down.”
On integrity
Warren Buffett: “I would never take real chances with other people’s money under any circumstances. Both Charlie [Munger] and I come from a background where we ran partnerships. I started mine in 1956 for seven either actual family members or the equivalent. And Charlie did the same thing 6 years later.
And neither one of us, I think — I know I didn’t and I’m virtually certain the same is true of Charlie – neither one of us ever had a single institution investment with us. The money we managed for other people was from individuals, people with faces attached to them, or entities’ money with faces attached to them.
We’ve always felt that our job is basically that of a trustee, and hopefully a reasonably smart trustee in terms of what we were trying to accomplish. But the trustee aspect has been very important. It’s true for the people with the structured settlements. It’s true for up and down the line, but it’s true for the owners very much, too. So we always operate from a position of strength.”
Why Buffett thinks he holds a lot more investments than people generally think, and why he keeps a lot of cash
Warren Buffett: “I show our cash and Treasury bills, positioned on March 31. And you might look at that and say, well, you’ve got [US]$125 billion or so in cash and treasury bills, and you’ve got — at least at that point, [US]$180 billion or so in equities. And you can say, well, that’s a huge position having Treasury bills versus just [US]$180 billion in equities. But we really have far more than that in equities because we own a lot of businesses. We own 100% of the stock of a great many businesses, which to us are very similar to the marketable stocks we own – we just don’t own them all. We don’t have a quote on them. But we have hundreds of billions of wholly owned businesses.
So there are [US]$124 billion – it’s not some 40% or so cash position. It’s far less than that. And we will always keep plenty of cash on hand for any circumstances. When the 9/11 comes along, if the stock market is closed as it was in World War I – it’s not going to be, but I didn’t think we were going to be having a pandemic when I watched that Creighton-Villanova game in January either.
So we want to be in a position at Berkshire where – you remember Blanche DuBois in A Streetcar Named Desire that goes back before many of you. In Blanche’s case, she said that she’s dependent on the kindness of strangers. And we don’t want to be dependent on the kindness of friends even, because there are times when money almost stops. And we had one of those, interestingly enough. We had it, of course, in 2008 and ’09 but right around the day or two leading up to March 23rd, we came very close. But fortunately, we had a Federal Reserve that knew what to do. But investment-grade companies were essentially going to be frozen out of the market.”
It’s a bad idea to borrow to juice returns
Warren Buffett: “CFOs all over the country have been taught to sort of maximize returns on equity capital, so they would finance themselves – to some extent – with commercial paper because that was very cheap. And it was backed up by bank lines and all of that. And they let the debt creep up quite a bit in many companies.
And then, of course, they all were scared by what was happening in markets [in March 2020], particularly the equity markets. And so they rushed to draw down lines of credit, and that surprised the people who had extended those lines of credit. They got very nervous. And the capacity of Wall Street to absorb a rush to liquidity that was taking place in mid-March was strained to the point where the Federal Reserve, observing these markets, decided they had to move in a very big way.
We got to the point where the US treasury market, the deepest of all markets, got somewhat disorganized. And when that happens, believe me, every bank and CFO in the country knows it. And they react with fear, and fear is the most contagious disease you can imagine. It makes the virus look like a piker [a North American term referring to a gambler who makes only small bets].”
Praise for the Federal Reserve
Warren Buffett: “We came very close [in March 2020] to having a total freeze of credit to the largest companies in the world who were depending on it. To the great credit of Jay Powell.
I’ve always had Paul Volcker up on a special place, a special pedestal in terms of Federal Reserve chairmen over the years. We’ve had a lot of very good Fed Chairman. But Paul Volcker, I had him at the top of the list. And I’ll recommend another book. Paul Volcker died about less than maybe a year ago, or a little less. But not much before he died, he wrote a book called Keeping At It. And if you call my friends at The Bookworm, I think you’ll enjoy reading that book. Paul Volcker was a giant in many ways, and he was a big guy, too. He and Jay Powell couldn’t see more in temperament or anything.
But Jay Powell, in my view, and the Fed board – I put him up there on that pedestal because with him, they acted in the middle of March, probably somewhat instructed by what they had seen in 2008 and ’09. They reacted in a huge way and essentially allowed what’s happened since that time to play out the way it has.
In March, the market had essentially frozen. But in a little after mid-month, it ended up – because the Fed took these actions on March 23 – it ended up being the largest month for corporate debt issuance, I believe, in history. And then April followed through with an even larger month. And you saw all kinds of companies grabbing everything coming to market. And spreads actually narrowed.
Every one of those people that issued bonds in late March and April should send a thank you letter to the Fed because it would not have happened if they hadn’t operated with really unprecedented speed and determination.”
Unknown consequences from the Fed’s actions
Warren Buffett: “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 6 or 7 weeks.
And like I say, we don’t know the consequences of that, and nobody does exactly. We don’t know the consequences of what undoubtedly we’ll have to do – but we do know the consequences of doing nothing. That would have been the tendency of the Fed in many years past – not doing nothing, but doing something inadequate. But Mario Draghi brought the “whatever it takes” to Europe. And the Fed in mid-March sort of did “whatever it takes squared”, and we owe them a huge thank you.
But we’re prepared at Berkshire. We always prepare on the basis that maybe the Fed will not have a Chairman that acts like that. And we really want to be prepared for anything. So that explains some of the [US]$124 billion in cash and bills. We don’t need it all. But we do never want to be dependent on not only the kindness of strangers, but the kindness of friends.”
Why Buffett thought his airline investments were a mistake
Warren Buffett: “You’ll see in the month of April that we net sold [US]$6 billion or so of securities. That isn’t because we thought the stock market was going to go down or because somebody changed their target price or they changed this year’s earnings forecast. I just decided that I’d made a mistake in evaluating – that was an understandable mistake, it was a probability-weighted decision when we bought.
We were getting an attractive amount for our money when investing across the airlines business. So we bought roughly 10% of the four largest airlines, and – this is not 100% of what we did in April – but we probably paid somewhere between [US]$7 billion and [US]$8 billion to own 10% of the four large companies in the airline business [in the US]. And we felt for that, we were roughly getting [US]$1 billion of earnings. Now, we weren’t getting [US]$1 billion of dividends, but we felt our share of the underlying earnings was [US]$1 billion. And we felt that that number was more likely to go up than down over a period of time. It would be cyclical, obviously. But it was as if we bought the whole company, but we bought it through the New York Stock Exchange. We can only effectively buy 10%, roughly, of the four. We treat it mentally exactly as if we were buying a business.
It turned out I was wrong about that business because of something that was not in any way the fault of four excellent CEOs. Believe me, there’s no joy being a CEO of an airline. But the companies we bought were well managed. They did a lot of things right. That’s a very, very, very difficult business because you’re dealing with millions of people every day. And if something goes wrong for 1% of them, they are very unhappy. So I don’t envy anybody the job of being CEO of an airline. But I particularly don’t enjoy them being in a period like this where people have been told basically not to fly. I’ve been told not to fly for a while. I’m looking forward to flying – I may not fly commercial, but that’s another question.
The airline business – I may be wrong, and I hope I’m wrong – but I think it changed in a very major way. And it’s obviously changed in the fact that the four companies are each going to borrow perhaps an average of at least [US]$10 billion or [US]$12 billion each. Well, you have to pay that back out of earnings over some period of time. I mean you’re [US]$10 billion or [US]$12 billion worse off if that happens. And of course, in some cases, they’re having to sell stock or sell the right to buy a stock at these prices, and that takes away from them the upside.
And I don’t know whether 2 or 3 years from now that as many people will fly as many passenger miles as they did last year. They may and they may not. The future is much less clear to me about how the business will turn out through absolutely no fault of the airlines themselves. A low-probability event happened, and it happened to hurt the travel business, the hotel business, cruise business, theme park business, but particularly the airline business. And of course, the airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear. So you’ve got too many planes. And it didn’t look that way when the orders were placed a few months ago and arrangements were made. But the world changed for airlines and I wish them well.”
Preparing for the worst
Becky Quick: ”Okay. The next question comes from Robert Tomas from Toronto, Canada. And he says, “Warren, why are you recommending listeners to buy now, yet you’re not comfortable buying now as evidenced by your huge cash position?”
Warren Buffett: “Well, (A) as I explained, the position isn’t that huge when I look at worst-case possibilities. I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. For example, in our insurance business, we could have the world’s or the country’s Number 1 hurricane that it’s ever had – but that doesn’t preclude the fact we’re going to have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum.
In 2008 and ’09, you didn’t see all the problems the first day. What really kicked it off was when Freddie and Fannie – the GSEs [government-sponsored enterprises] – went into conservatorship in early September and then when money market funds broke the buck. I mean there are things to trip other things, and we take very much a worst-case scenario into mind that probably is considerably worse than most people do. So I don’t look at it as huge.”
Thoughts on capital allocation
Becky Quick: “Greg, let me ask you one of these capital allocation questions. This one comes from Matt Libel. And he says, Berkshire directed 46% of capital expenditure in 2019 to Berkshire Hathaway Energy. Can you walk us through with round numbers how you think differences in capex spending versus economic depreciation versus GAAP depreciation and help explain the time frame over which we should recognize the contracted return on equity from these large investments as we as shareholders are making in Berkshire Hathaway Energy?”
Greg Abel: “Right. So when we look at Berkshire Hathaway Energy and their capital programs, we try to really look at — look at it in a couple of different packages.
One, what does it actually require to maintain the existing assets for the next 10, 20, 30 years, i.e. it’s not incremental. It’s effectively maintaining the asset, the reflection of depreciation. And our goal is always to clearly understand across our businesses, do we have businesses that require more than our depreciation or equal or less? And I’m happy to say with the assets we have in place and how we’ve maintained the energy assets, we generally look at our depreciation as being more than adequate if we deploy it back into capital to maintain the asset.
Now the unique thing in the lion’s share of our energy businesses that are regulated, and that exceeds 85% of them – 83% of them – we still earn on that capital we deploy back into that business. So it’s not a traditional model where you’re putting it in, but you’re effectively putting it in to maintain your existing earnings stream. So it’s not drastically different, but we do earn on that capital.
But what we do spend a lot of time on – when Warren and I think about the substantial amounts of opportunities, that’s incremental capital that is truly needed within new opportunities. So it’s to build incremental wind, incremental transmission that services the wind, or other types of renewable solar. That’s all incremental to the business and drives incremental, both growth in the business – it does require capital – but it does drive growth within the energy business. So there’s really the 2 buckets. I think we would use a number a little bit lower than the depreciation. We’re comfortable the business can be maintained at that level. And as we deploy amounts above that, we really do view that as “incremental or growth capex”.”
Warren Buffett: “Yes, we have what, [US]$40 billion or something? What do we have kind of in the works?”
Greg Abel: “Well, yes. So we have basically, as Warren is highlighting, [US]$40 billion in the works of capital. That’s over the next, effectively, 9-year, 10-year period. Approximately half of that, we would view as maintaining our assets. A little more than half of it is truly incremental. But those are known projects we’re going to move forward with. And I would be happy to report, we probably have another [US]$30 billion that aren’t far off of becoming real opportunities in that business.
So as Warren said, that takes a long time. It’s a lot of work. The transmission projects, for example, that we’re finishing in 2020 were initiated in 2008 when we bought PacifiCorp. I remember working on that transmission plant, putting it together, thinking 6 to 8 years from now, we’ll have them in operation. 12 years later – and over that period of time, we earn on that capital we have invested and then when it comes into service, we earn on the whole amount. So we’re very pleased with the opportunity. We plant a lot of seeds, put it that way.”
Warren Buffett: “Yes. And it’s not like they’re super high-return, but they’re decent returns over time. And we’re almost uniquely situated to deploy the capital – I mean you could have government entities do it too, but in terms of the private enterprise. They take a long time. They earn decent returns. I’ve always said about the energy business: It’s not a way to get real rich, but it’s a way to stay real rich.
We will deploy a lot of money at decent returns, not super returns. You shouldn’t earn super returns on that sort of thing. You are getting rights to do certain things that governmental authorities are authorizing and they should protect consumers – but they also should protect people that put up the capital. It’s worked now for 20 years and it’s got a long runway ahead.”
The risks of investing in oil & gas companies
Becky Quick: “Let me follow-up with this one, and this one comes in from Amish Bal, who says, “Is there a risk of permanent loss of capital in the oil equity investment?””
Warren Buffett: “Well, there certainly is. There’s no question. If oil stays at these prices, there’s going to be a whole lot of money – and it will extend to bank loans and it will affect the banking industry to some degree. It doesn’t destroy them or anything, but there’s a lot of money that’s been invested that was not invested based on a [US]$17 or [US]$20 or [US]$25 price for WTI, West Texas Intermediate oil. But you can do the same thing in copper and you can do the same thing in some of the things we manufacture. But with commodities, it’s particularly dramatic. Farmers have been getting lousy prices, but to some extent, the government subsidized them. I’m all for it, actually.
But if you’re an oil producer, you take your chances on future prices unless you want to sell a lot of futures forward. OXY [Occidental Petroleum] actually did sell 300,000 barrels a day of puts in effect – or they bought puts and sold calls in effect to match it. And they were protected for a layer of [US]$10 a barrel on 300,000 barrels a day. But when you buy oil, you’re betting on oil prices over time and over a long time. And there’s risk, and the risk is being realized by oil producers as we speak. If these prices prevail, there will be a lot of bad loans and bad debts in energy loans. And if there are bad debts in energy loans, you can imagine what happens to the equity holders. So yes, there’s a risk.”
Effects of negative interest rates on Berkshire’s insurance business
Becky Quick: “All right. This question comes from Rob Grandish in Washington, D.C. He says “Interest rates are negative in much of Europe, also in Japan. Warren has written many times that the value of Berkshire’s insurance companies derived from the fact that policyholders pay upfront, creating insurance float on which Berkshire gets to earn interest.
If interest rates are negative, then collecting money upfront will be costly rather than profitable. If interest rates are negative, then the insurance float is no longer a benefit but a liability. Can you please discuss how Berkshire’s insurance companies would respond if interest rates became negative in the United States?””
Warren Buffett: “Well, if they were going to be negative for a long time, you better own equities. You better own something other than debt. I mean it’s remarkable what’s happened in the last 10 years. I’ve been wrong in thinking that – you could really have had the developments we’ve had without inflation taking hold.
But we have [US]$120-odd billion — well, we have a very high percentage in treasury bills — in cash. Those treasury bills are paying us virtually nothing. They’re a terrible investment over time. But they are the one thing that when opportunity arises – it will arise at the time and it may be the only thing you can look to, to pay for those opportunities, is the treasury bills you have. I mean, the rest of the world may have stopped. And we also need them to be sure that we can pay the liabilities we have in terms of policyholders over time. And we take that very seriously.
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 and I’ve been surprised, so I’ve been wrong so far. I would say this, if you can 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 of thousand years rather than just coming onto it now. But we will see.
It’s probably the most interesting question I’ve ever seen in economics: Can you keep doing what we’re doing now? And we’ve been able to do it. The world has 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 it before. Greg, do you have any thoughts on that? I wish I knew the answer, maybe you do.”
Greg Abel: “No, I think as you articulated – I think it was in the annual report too – we don’t know the answer. But as you said, some of the fundamentals right now are very interesting relative to having a negative interest rate. But no, I hate to say it, but I don’t have anything to add.”
Warren Buffett: “I’d love to be Secretary of Treasury, if I knew I can 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, they’re the right things, but I don’t think they’re without consequences. And I think they could be kind of extreme consequences if pushed far enough, but there would be kind of extreme consequences if we didn’t do it as well. So somebody has to balance those questions.”
The risk of the US government defaulting on its debt
Becky Quick: “All right. This question comes from Charlie Wang. He’s a shareholder in San Francisco. He says, “Given the unprecedented time of the economy and the debt level, could there be any risks and consequences of the U.S. government defaulting on its bonds?””
Warren Buffett: “No. If you print bonds in your own currency, what happens to the currency is that it can be a question because you don’t default. And the United States has been smart enough – and people have trusted us enough – to issue its debt in its own currency. And Argentina is now having a problem because the debt isn’t in their own currency and lots of countries have had that problem, and lots of countries will have that problem in the future. It’s very painful to owe money in somebody else’s currency.
Listen, if I could issue a currency – Buffett bucks – and I had a printing press, and I could borrow money in that, I would never default. So what you end up getting in terms of purchasing power can be in doubt. But in terms of the US government.. When Standard & Poor’s downgraded the United States government – I think it was Standard & Poor’s, some years back – that, to me, did not make sense. How you can regard any corporation as stronger than the person who can print the money to pay you, I just don’t understand. So don’t worry about the government defaulting.
I think it’s kind of crazy incidentally. This 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 refinanced. And anybody that thinks they’re going to bring down the national debt.. I mean there’s been brief periods and I think it’s in the late ’90s or thereabouts, when it has come down a little bit. The country is going to grow in terms of its debt-paying capacity. But the trick is to keep borrowing in your own currency.”
How to detect malfeasance in banks, and the current state of the banking industry in the US
Becky Quick: “This is one that comes from Thomas Lin in Taiwan. He says, “Warren once said that banking is a good business if you don’t do dumb things on the asset side. Given that the pandemic might put a lot of pressure on the loans, dumb things that got done in the past few years are likely to explode. Through reading annual reports, 10-Qs and other public information, what clues are you looking for to decide whether a bank is run by a true banker who avoids doing dumb things?””
Warren Buffett: “That’s a very good question. But I would say that the one thing that made Chairman Powell’s job a little easier this time than it was in 2008-09 is that the banks are in far better shape. So in terms of thinking about what was good for the economy, he wasn’t at the same time worrying about what he was going to do with Bank A or Bank B, to merge them with somebody else, or put added strains on the system or anything.
The banks were very involved with a problem in 2008 and ’09. They had done some things they shouldn’t have done in some of them. And they were certainly in far different financial condition. So the banking system is not the problem in this particular — I mean, we decided as a people to shut down part of the economy in a big way. And it was not the fault of anyone that it happened. Things do happen in this word. Earthquakes happen. Huge hurricanes happen. This was something different.
But the banks need regulation. I mean they benefit from the FDIC. But part of having the government standing behind your deposits is to behave well, and I think that the banks have behaved very well. And I think they’re in very good shape. That’s how the FDIC has built up the [US]$100 billion that I’ve talked about. They’ve assessed the banks in recent years at accelerated amounts in certain periods, and they even differentiated against the big banks. So they built up great reserves there. And they built their own balance sheets, and they are not presently part of Chairman Powell’s problem, whereas they were very much part of Chairman Bernanke’s problem back in 2008 and ’09.
How will you spot the people that are doing the dumb things? It’s not easy – well, sometimes it’s easy. But I don’t see a lot that bothers me. But banks are, in the end, institutions that operate with significant amounts of other people’s money. And if problems become severe enough in an economy, even strong banks can be under a lot of stress and we’ll be very glad we’ve got the Federal Reserve system standing behind them. I don’t see special problems in the banking industry.
Now I could think of possibilities, and Jamie Dimon referred to this a little bit in the JPMorgan report. You can dream of scenarios that put a lot of strain on banks. They’re not totally impossible – that’s why we have the Fed. I think overall, the banking system is not going to be the problem. But I wouldn’t say that with 100% certainty because there are certain possibilities that exist in this world where banks can have problems. They’re going to have problems with energy loans. They’re going to have extra problems with consumer credit. But they know it, and they’re well reserved – well, they’re well capitalized for it. They were reserve-building in the first quarter, and they may need to build more reserves, but they are not a primary worry of mine at all. We own a lot of banks, or we own a lot of bank stocks.”
Recognising heroes and making sure no one’s left behind
Becky Quick: “Warren, this question comes from Bill Murray, the actor, who is also a shareholder in Berkshire. He says “This pandemic will graduate a new class of war veterans, health care, food supply, deliveries, community services. So many owe so much to these few. How might this great country take our turn and care for all of them?”
Warren Buffett: “Well, we won’t be able to pay actually – it’s like people that landed at Normandy or something. The poor, the disadvantaged, they suffer – there’s an unimaginable suffering. And at the same time, they’re doing all these things – they’re working 24-hour days and we don’t even know their names. So we ought to – if we go overboard on something, we ought to do things that can help those people.
This country – I’ve said this a lot of times before – we are a rich, rich, rich country. And the people that are doing the kind of work that Bill talks about, they’re contributing a whole lot more than some of the people that came out of the right womb, or got lucky and things, or know how to arbitrage bonds or whatever it may be. In a large part, I’m one of those guys. So you really try to create a society that under normal conditions with more than [US]$60,000 of GDP per capita, that anybody that works 40 hours a week can have a decent life without a second job and with a couple of kids. They can’t live like kings, I don’t mean that, but nobody should be left behind.
It’s like a rich family. You find rich families and they have 5 heirs or 6 heirs. They try and pick maybe the most able one to run the business. But they don’t forget about the kid that actually may be a better citizen in some ways than even the one that does the best at business, but they just don’t happen to have market-value skills. So I do not think a very rich company ought to totally abide by what the market dishes out in 18th-Century style or something of the sort.
So I welcome ideas that go in that direction. We’ve gone in that direction. We did come up with social security in the ’30s. We’ve made some progress. But we ought to – we have become very, very, very rich as a country. Things have improved for the bottom 20%. You see various statistics on that. I’d rather be in the bottom 20% now than be in the bottom 20% 100 years ago or 50 years ago. But what’s really improved is the top 1% – and I hope we, as a country, move in a direction where people Bill’s talking about get treated better. And it isn’t going to hurt the country’s growth and it’s overdue. A lot of things are overdue.
I will still say we’re a better society than we were 100 years ago. But you would think with our prosperity, we would hold ourselves to even higher standards of taking care of our fellow man, particularly when you see a situation like you’ve got today where it’s the people whose names you don’t know that are watching the people come in and watching the bodies go out. Greg?”
Greg Abel: “Yes. The only other group that I would highlight – I think it will be very interesting how it plays out – is with the number of home schooling and the children that are home. We’ve always had so much respect for teachers, but we all talk about how we don’t take care of them. And it is remarkable to hear how many people comment that, clearly, we don’t recognize – I have a little 8-year old back at home and plenty of challenges for Mom – but all of a sudden, you respect the institution, the school, the teachers and everything around it.
And then when I think of our companies and the delivery employees we have, it’s absolutely amazing what they’re doing. They’re truly on the front line. That’s where we have our challenges around keeping their health and safety. And then you go all the way to the rail. The best videos you see out of our companies are when we have folks that are actively engaged in moving supplies, food, medical products – and they’re so proud of it. They recognize they’re making a difference. So a lot of it is we just owe them a great thanks.
And Warren, you touched on it, we can, in some way, maybe, hopefully longer-term, compensate them. But there’s a great deal of thanks, and I probably just think an immense amount of new appreciation for a variety of folks.”
Warren Buffett: “We’re going in the right direction all around the country but it’s been awfully slow.”
Is capitalism broken?
Becky Quick: “Gentlemen, I’ll make this the last question. It comes from Phil King. He says “Many people in the press and politics are questioning the validity of capitalism. What can you say to them that might prompt them to take a look at capitalism more favorably?”
Warren Buffett: “Well, the market system works wonders, but it’s also brutal if left entirely to itself. We wouldn’t be the country we are, if the market system hadn’t been allowed to function. And you can say that other countries around the world that have improved their way of life dramatically, to some extent, have copied us.
So the market system is marvelous in many respects. But it needs government. It is creative destruction. But for the ones who are destroyed, it can be a very brutal game, for the people who work in the industries and all that sort of thing. So I do not want to come up with anything different than capitalism, but I certainly do not want unfettered capitalism.I don’t think we’ll move away from it, but I think… Capitalists, I’m one of them. I think there’s a lot of thought that should be given to what would happen if we all draw straws again for particular market-based skills.
Somewhere way back, somebody invented television, I don’t know who it was. And then they invented cable, then they invented pay systems and all of that. And so a fellow who could bat 0.406 in 1941 was worth [US]$20,000 a year. And now a marginal Big Leaguer will make vastly greater sums because in effect, the stadium size was increased from 30,000 or 40,000 or 50,000 people, to the country. The market system – capitalism – took over. And it’s very uneven, and in same way – I think that Ted Williams is worth a lot more money than I’ve ever should make. But the market system can work toward a winner-takes-all type situation. And we don’t want to discourage people from working hard and thinking.
But that alone doesn’t do it, there’s a lot of randomness in the capitalist system, including inherited wealth. I think we can keep the best parts of a market system and capitalism and we can do a better job of making sure that everybody participates in the prosperity that that produces. Greg?”
Greg Abel: “I think it’s always keeping the best parts of it. I even think if we look at the current environment we’re in – the pandemic – and we have to do it only when we can do it properly and reemerge. But in some ways, the best opportunity for people is when we’re back working clearly and that the system is functioning again. But that’s the obvious. And Warren, you’ve highlighted, there’s a lot of imperfections, but it’s definitely the best model out there that just needs some fine tuning.”
The amazing Ben Graham
Becky Quick: “Can I just slip in one more quick question? I forgot this one, someone sent it in earlier. Anderson Hexton wrote in. He said: “Warren mentioned that Ben Graham is one of the three smartest people he’s ever met. I’d like to ask him the names of the other two.””
Warren Buffett: “[Laughs] Well, I may not be one of the smartest, but I’m smart enough not to name the other two. I make only two people happy.
Ben Graham is one of the smartest people, and I know some really smart people. Smartness does not necessarily equate to wisdom, either. And Ben Graham, one of the things he said he liked to do every day was he wanted to do something creative, something generous, and something foolish. And he said he was pretty good at the latter, but he was pretty good. He was amazing, actually.”
Closing remark: Never bet against America
Warren Buffett: “And Becky, I would just say again that – I hope we don’t – but we may get some unpleasant surprises. And we are dealing with a virus that spreads its wings in a certain way, in very unpredictable ways and how all Americans react to it. There’s all kinds of possibilities, but I definitely come to the conclusion after weighing all that, sort of – never bet against America. So thanks.”
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