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Our special guest today is Berkshire Hathaway Chairman and CEO Warren Buffett. Warren, we discussed a lot of things today. You briefly shared your thoughts on the markets, but a lot has changed there since our last meeting . Volatility has returned sharply, and this is making the average private investor wonder what to do now.
This scared many. What do you think is happening now with the return of volatility? Should I be worried about this? What is the reason for this? Well, if you own stocks like you own a farm or an apartment building, you don't get quotes every day or every week. I think you look at a business, and the value of an American business depends on how much cash it will bring to the owners between now and doomsday.
And I don't think it changes by 10% in two months if you look at it as a business. Now you have anything can happen in the markets. I mean, anything can happen in the markets, so never borrow money against securities, because the markets may not open tomorrow. That is, extraordinary events can occur.
So I think that to some extent you can get tools that people don't understand well, but that have a lot of power, and you can trade by taking a position, and that's a gamble. This is not investing. Nobody invests when they buy, you know, some supercharged index like the VIX or something like that. They don't need this in their lives.
This is an unnecessary tool. You know, they're going to create tools that the public will buy, and you can count on that . Wall Street has been doing this since they gathered under the sycamore tree in 1792 or when there was a stock exchange there. So, but if you invest, if I'm going to buy a half share in a McDonald's kiosk, and you're going to run it as a franchise, you're going to run it.
I look at the business to determine if I made a good investment. And I'm worried whether we have new competition. Oh, over the years it appears. But I'm looking at business. When you only look at the price of something, you are not investing. I mean, if you buy something like Bitcoin or another cryptocurrency, you don't expect the asset itself to generate any income.
If you buy an apartment building, you look at how it functions. If you buy a farm, you look at how the farm operates. If you buy a business outright, you look at how that business operates. If you are buying a part of a business, why don't you look at how that business will operate ? But people are fascinated by the activity and the fact that it's all liquid and stuff.
And that has implications for the market when things like instruments like ETNs based on the VIX emerge. I mean, where you can lose 90% of your money in one day. This really has nothing to do with the word "investment." It's simple, it's a kind of gamble. Although you said it yourself in your annual letter over the weekend, and even at the beginning of the show, that when you're looking for a business to buy, you can't find anything at an attractive price.
However, when you look at stocks, you think it's a good place to be, and Berkshire was a net buyer of stocks in 2018 because you like the deals the market is offering. You can buy small parts of a business cheaper than an entire business. the premium you would have to pay if you were buying the business outright.
So, as an investor, you get a benefit compared to what I could get by buying the business outright. If people simply thought of stocks as shares of a business, they would be much better off than thinking of them as trinkets whose price constantly fluctuates. And I think there are quite a few people among Berkshire shareholders who simply view Berkshire as a business.
They look at it like a savings account. They invested money 20, 30 or 40 years ago. We hold them and reinvest for them, we are their savings account. And that's how I look at my own stocks. That's how Charlie looks at his stocks. And part of the reason you've remained bullish on stocks for so long is the low interest rate environment.
You looked at interest rates and said they act like gravity on stock prices. And when interest rates are so low, stock prices will inevitably rise. Something strange is happening in the markets : Suddenly, good news from the employment report has made people worry that interest rates will rise and that the Fed will raise rates more than expected.
People were very nervous about it, and it's still noticeable. Whenever the 10- year bond yield approaches 3%, it causes investors—or, more accurately, traders —to have some concerns about what's going on. Like how you, let's say, if you buy a bond, let's say a 30- year Treasury bond, there's a whole bunch of coupons attached to it.
It used to be like that; everything is now electronic . But there's a whole stack of coupons there, and the coupon says 3% or something like that, and you know that's what you're going to get for the next 30 years, and then you get your money back. What is a promotion? The action is the same. This is a set of coupons, they just don't have numbers printed on them yet , and your job as an investor is to enter those numbers.
If these numbers say 10%—and most American companies earn more than 10% on tangible capital. If it says 10%, then such a bond is worth much more than a bond that says 3%. But if the yield on government bonds reaches 10%, that changes the value of this " equity bond" that you are actually buying. When you buy stock in General Motors, Hathaway, or anything else, you are buying something that will make you cash over time.
It may take a long time in the case of Berkshire, but the amounts will be larger. These are the coupons, and your job as an investor is to decide what those coupons will be, because that's what you're buying. And you buy the discounted value of that asset. And the higher the benchmark becomes—and the benchmark is government bonds—the less attractive these other bonds look.
And that's just fundamental economics. So in 1982-83 , when long-term government bond yields reached 15%, a company earning 15% on capital was not worth more than its book value, because you could buy 30-year bonds and be guaranteed to receive 15% per annum. And a business that earned 12% was considered below average at the time.
But a business that earns 12% when government bonds yield 3 %—that's an extraordinary business, and that's why they sell at very high prices. So 3%—that's a far cry from the 15% you just talked about, but I've also seen it go from three to 15 . Of course. Is there an inflection point on this path ? Because people think, "Oh my God, we went from 2.4% to 2.9%, and that's a big difference." Not very.
So, from a historical perspective, that's how we should evaluate it , not by absolute changes or percentage growth over time. 2.4 to 2.9 is nothing compared to a business that earns 12% on capital and reinvests it. If you look at S&P data over the decades, companies have been making much more money on tangible capital , and that translates into higher prices than they should be.
Is there a critical point on this path, or is it a gradual decline in the Nobody Else plan? Yes. But this is gravity. I mean, if you told me that next year long-term bond interest rates would be 15% , I would...There are a lot of stocks that I wouldn't want to own right now, and I won't. I would have bought a lot of government bonds at 15%, and I regret not doing so in 1982, but I didn't.
If I told you that next year long-term bonds would trade at 4.5–5%, that would matter. But owning long-term bonds was pointless. Over the last...You know, I write about this in the report on our...It was just ridiculous. And the big state pension funds and others—they sat and held the bonds. Right now they could buy them at 4 or 5%, but if they go to 3%, they will sell them well above par.
The way people think about it...they do very stupid things. I mean, you lay it out in the annual report, but a lot of investors, retail investors, are told that they have to have a certain percentage of their portfolio in bonds. Maybe they're told 60/40, maybe 70/30 stock to bond ratio. This is what you should do, and it is a safe way to invest.
What are they missing? Some people shouldn't own stocks at all because they get too upset about price fluctuations. If you're going to do stupid things because your stocks are falling, you shouldn't own them at all. What...what do you mean by nonsense? Selling stocks that are falling. Yes, selling shares whose price is falling.
I mean, if you buy a house for $20,000 and the next day someone offers you $15, you don't sell it just because the price dropped to $15. You look at the house itself or whatever it is . But some people are not actually emotionally or psychologically ready to own stocks. Although I think most would be willing if they had a better understanding of what they were actually buying—a share of the business.
And the longer you hold stocks, the less risky they become. Whereas the longer the maturity of a bond, the riskier it becomes. Do you feel like this message is reaching people? You repeat it over and over again, and I... I always feel like when I watch the Olympics, everything they do there seems so easy.
These guys fly in the air, do incredible spins on the ice and pirouettes. And then I read your annual letter and think, "Oh, investing really is easy." And then I put it down and realize that it's not that easy. This is psychologically difficult for many people, but I have been teaching since I was 21.
I taught my first lesson on investments, and last week I had a class with students from 11 schools, 220 students, and some of them understand and some don't. People prefer to gamble. I mean, the idea that you can double your money in 6 months is exactly why people go to the races, why they go to Vegas, or whatever.
They...they even know the odds are not in their favor, but they do it anyway. It's a strong instinct— the desire to get rich quick, but I don't know how to do it. Joe also has a question he would like to ask. Joe. Buffett, you haven't tweeted since April 2016, man. Is this true? I didn't actually tweet that.
I have a friend who tweeted about seven times. You're not subscribed to anyone , you don't read anyone...you know, Warren, you're coming on Squawk Box this morning for 3 hours. It wouldn't kill you to say, " I'll be on Squawk Box for 3 hours" and tweet it as a favor to Becky and me. I mean, make me an offer.
I've never actually tweeted and, to be honest , I don't even know how to do it. And I don't know how to look at other people's tweets, but I still don't look at them, maybe you'll figure it out? You know what? I'll tell you something , Warren. Becky, this weekend I was trying to figure out ... I'm so annoyed that I don't need this, you know?
Not from what people send, but from looking at what others tweet and retweet. I am annoyed . And I'm trying to find a way to get the information I sometimes have, but without being involved in the process itself. Do you have a way for me to do this? But then I'll still be subscribed to these annoying people.
I do n't know. I You know, if we make it to the NCAA finals and we're there together in these great places, I'm for you Yes. Because Creighton is involved. I don't know. Hopefully I'll ask you to tweet for me during the game. Oh, be careful with your suggestions, Warren. Joe, how about the keys to the lock?
How do you like that? You will be the designated tweeter . God, there are so many. I've never read a single tweet. I I...You know what? I'm betting on Creighton and Xavier, now I'm really going to root...You know, but this. Becky, it's me...it's me. I unblocked someone who emailed me today . And I've never done this before, I had to figure out how to do it.
But it is on probation , at the discretion of the council or at the discretion of the board. But I've never done this before . So, someone ...Yes, but someone came back. So, you will be able to do these things if you join us. I prefer to read 10-K reports. Of course. You don't realize how dangerous a suggestion you just made, because Joe and I joked about being able to access someone's Twitter account if they left it on the screen we were sitting at.
Something you can post or tell people. This is very dangerous. on behalf of someone else. Well, people were impersonating me on both Facebook and Twitter. I mean, you tried to find those people who had been doing this for a while. I just...There are just so many of them. It's almost hopeless. Every time you eliminate one, eight more appear. Hello, thank you for watch the most important event you for watching.
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