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We believe that any company that has an economist, you know, probably has one more employee than necessary. Uh -huh. Um, this question relates to two metrics, Warren, that you've discussed in the past regarding the overall stock market. The first is the percentage of total market capitalization relative to US GDP, which, as you said, is probably the best indicator of the state of valuations at any given time.
This figure is about 125%. This is, uh, the ratio of total market capitalization to US GDP, and it's about the same as it was when Warren was talking about this back in 1999, just before the bubble burst. Um, the second metric you mentioned in that famous 1999 speech that later became an article in Fortune is corporate profits as a percentage of GDP.
You said then that this number fluctuated between 4% and 6.5% over a long period of time, which I believe covered the period from 1951 to 1999. Well, as of Friday, it's about 10.5%, according to the Federal Reserve Bank of St. Louis website. This is well above the range you mentioned. Are the current levels of one or both of these indicators a cause for concern for the general investor community?
Yes. Well, the second indicator, profit as a percentage of GDP, may be a cause for concern for other segments of society because it indicates that American business has done a great job in recent years. And while they say it's at a terrible disadvantage because of US tax rates and a whole host of other things, the facts show that American business is incredibly thriving .
And the first comparison, uh, depends a lot on the fact that we're living in an environment of interest rates that Charlie and I probably thought were almost impossible just a few years ago. And obviously, the profits are worth a lot more, uh, if the government bond yield is 1 % than if it were 5% , so it goes back to the question of alternatives.
And, you know, Charlie in that movie talked about alternatives and opportunity costs, and for a lot of people, opportunity costs are owning a lot of bonds that are paying almost nothing , or stocks that are selling at historically high prices, but they weren't selling at those prices at those interest rates.
I look at these numbers, but I also look at them in the context of the fact that we live in a world that has incredibly low interest rates, and the question is how long they will persist. Will it be like Japan, where it has been going on for decades? Will we return to what we considered normal interest rates?
If we return to normal rates, stocks at these prices will look quite expensive. If we continue to live with these rates, stocks will look very cheap. Here I gave you the answer, choose for yourself. Charlie? Well, since we couldn't predict what happened and what is now, why should anyone ask us about our predictions for the future?
By the way, I can assure you of one thing: as far as I can remember, Charlie and I have never bought or sold a deal based on macroeconomic factors. We discuss deals when they come up , but whether it's See's Candy or something else, we bought Burlington Northern at a terrible time. These are general economic conditions, but we don't talk about them, it just doesn't come up because we know we don't know what the next 12, 24 or 30 months will look like, but it doesn't matter if we're buying a business to hold for 100 years.
All we need to do is figure out what the average profitability of the business is likely to be over time, how strong its competitive moat is, and the like. So people find it hard to believe it. They think we're discussing it. We believe that any company that has an economist definitely has too many for one employee .
Uh, can you think of anything rude that I have n't said yet? Well, it would be hard to top that . Good. Let's eat some fudge, Charlie. Why are you excited? So ? Why are you happy to see my superstars here? I'm Leo, a value investor from China and a loyal fan of yours and Charlie's. Many Chinese investors feel pressured by results, questions, and even ridicule for value investing.
Many also believe that value investing is not applicable to China, where the stock market has doubled in the last 6 months. I would like to ask Mr. Buffett, do you think value investing can be broadly applied to all markets, or only in developed markets like the United States? Do you have any advice for value investors on how to handle pressure and be happier?
Thank you. Okay, I'm not sure I heard everything, but Charlie will help me. I definitely believe that investment principles have no boundaries. So if I were investing in China or anywhere else—India , the UK, Germany—I would apply the exact same principles I learned from The Intelligent Investor. I would view the shares as a small share of the business.
I would view market fluctuations as something that works to my advantage, not to my detriment. And I would try to focus my attention on businesses where I understand their competitive advantage and what they will look like in five or ten years. So, I don't think I would change these principles at all.
I'm not sure I understand the whole question. Charlie, maybe Charlie can fill in the rest. Well, the Chinese have a history of being very entrepreneurial people, willing to take a lot of risk when an opportunity presents itself, and that has created a lot of volatility in Chinese stock markets, and when things are going great and successful, like during our dot-com boom in the US, China is very much like Silicon Valley.
I think China would be much better off being more focused on value investing and less caught up in waves of speculation. So I think the more China copies Berkshire's style of operation, the better it will be for China. Yes, there is a certain irony in this. There is a certain irony in the fact that we would have achieved the best results in decades if we were operating in a market where people behave very unwisely.
And the fact that people react to short-term events and exaggerations, or whatever, that makes people wildly excited or desperate—that's exactly what allows you to make a lot of money in securities. On the other hand, it's not the best thing for society, and uh Charlie and I have benefited enormously from the fact that there have been several such periods over a 50- year period .
Perhaps the most extraordinary years were 1973 and 1974, when you could buy stocks incredibly cheaply. Cheaper than it was in 2008 and 2009 . And you know, it doesn't make sense to have that much volatility in the market, but people behave the way they behave, and they will continue to behave the same way for the next 50 years.
I mean, if you're a young investor and can step back, evaluate stocks like a business and invest when everything is really cheap, regardless of what anyone says on TV or what you read. And maybe, if you want, sell when people get overly enthusiastic. It's actually not a very complex intellectual game.
It's a very...it's an easy game if you can control your emotions. And as Charlie says, he thinks we've talked a little bit about the fact that the Chinese market could have more speculative influences, even more than in the United States, because it's a relatively new development and it can lead to greater extremes, and that should create great opportunities.
Try it. Yes, but there are great opportunities for excesses and unpleasant downturns after unnatural booms and so on. I think China is doing the right thing by curbing speculative booms, and I don't think value investing will ever go out of style. Who the hell doesn't want to get value when they buy something?
Could there be anything else that makes sense besides value investing? Although it never becomes too popular. People are looking for the easy way out. Yes. And this is a mistake. It looks easier, but it's actually harder. And you can get a lot of grief by using stocks incorrectly . Yes. Nobody buys a farm to make a bunch of money next week or next month.
Or they buy, you know, an apartment building. They. They buy it based on what they think the long-term future will be, and if they make a reasonable calculation and the purchase price looks attractive, they buy. And then they don't get quotes for it every day, every week, every month, or even every year.
And that's probably the best way to look at stocks. Carol? Mr. Buffett, you have expressed your optimism about America's future many times and have often emphasized that the US simply has a better economic system. But my question, from Christopher Gottschau in New York, is about the risk of chemical, nuclear, biological and cybersecurity issues, and the audience should pay attention to the initial letters of those words when I tell you that Mr.
Buffett sometimes calls it CNBC. Sorry, Becky. Well, I'm just doing this to tease people, but... Wait a minute. Like...One more thing ...One more thing. How do these threats affect your forecast? Well, they are a big threat to the United States. We have and will have a great economic system. You know, your children will live better than you , and your grandchildren will live better than them .
There are ups and downs, but just go outside or look out the window of the plane on your way home, imagine what these lands looked like in 1776, and everything that has happened since then is our profit. I mean, farms have become incredibly more productive, and cities have grown. It's all here, and it's all made possible by the unleashing of the energy and intelligence of the American people, and a system that works quite well, despite all the flaws we keep talking about.
So, it's not lost at all , although people are upset because we only have 2% growth. But 2% growth with 1% population growth means 20% growth per generation. And 20% of GDP per capita at 54,000 is an additional 10,000 GDP per capita in the next generation. This country has a great future, but as the questioner pointed out, it could all be brought to nothing by madmen, rogue states, religious fanatics, or sociopaths seeking access to weapons of mass destruction and nuclear weapons.
I used to think of it as the main one, but now you can add biological, chemical, and cyber weapons. There are already a huge number of people who wish harm, especially to the United States, although to other countries as well. These people are not going anywhere, they will look for more inventive ways to use the raw materials they have or can access, as well as better delivery systems, which is why we need an extremely vigilant security service in the United States, because there will always be threats.
I'm a little concerned about these issues, but this is what we live with. At the same time, we live in a country that will achieve extraordinary success , and if we successfully avert these threats or at least minimize their impact, I still maintain that the luckiest person in history is a child born in the United States today.
Charlie? Well, of course, we were in a privileged position, we got a privileged outcome, and we were also lucky. Um, I think I probably lived in the most ideal era that any person in history could have been born into. I think you do too, or so I think. But I don't think we should be too proud. China has developed much faster than any other major nation to date.
And, well, that's good for us. Well, I think, I think, I can hardly think of anything more important than the future close cooperation between the United States and China. And you're talking about the two most important nations in the world in the future. And I think it's very important that we like each other, trust each other , have a very good relationship, and work together to avoid the bad consequences that arise from the mistakes and misconduct of others.
So I think both China and the United States would be crazy not to cooperate and build trust. Um, I don't think there's anything more important that we can do for our shared security and the common good of the world. If you had a choice, would you rather be born now with all the qualities you have or when you were born?
Well, I have to say, it's very interesting now, but that was all. I think that's too complicated a question. I don't like these very theoretical questions. I'd rather think of something where I could gain some advantage or help someone else gain one.
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