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Dear Mr. Buffett and Mr. Munger, my name is Adrian Churn. I am a shareholder from Hong Kong. Thank you for your leadership and continued inspiration . It's always wonderful to hear from you . If possible, I would like to ask you both a two-part question . Maybe after you answer the first part , I'll ask the second part.
The first part of the question relates to the Fortune article that appeared on December 10th. You have now included stakeholder material. In this article, you stated that the striking difference in markets cannot be explained by differences in GMPP growth. However, this difference can be explained by interest rates.
This is my first question. Sir, I doubt this explanation would be clearer if we look at the price of gold during the two periods you mentioned, i.e. 1948-64 and 64-81. So, the logical reason for the Dow Jones to be at 177 points in 1948 , and half of the 1929 level of 381 index points, was the 71% fall in the value of the American dollar from $20.5 to $35 per ounce.
Considering the 50% per capita profit in the 1940s that you mentioned , the correct value for the Dow Jones should be at 166 . Yes. I grew up in a family, including my sisters , where we often discussed gold . That...so, I've heard a lot of thoughts on those things over the last few years . I don't think anything about gold .
That... Actually, I don't think the price of gold has anything to do with the value of businesses. It may reflect certain things happening in the prices of businesses at a particular time ; But I , when calculating the value of a business, do not consider the price of gold in any aspect of my thinking, whether it was today, a year ago, ten years ago, or tomorrow.
When we look at Larson Jewels, a custom picture frame operation, I don't think it has anything to do with the price of gold. So, it's not more important to us than other things. I mean, it's, um, you know, it could be wheat , it could be cocoa beans or something else , um, it has a hold on people and they, um , they but, we don't see it as an interesting investment and we don't even see it as a yardstick to assess the value of other investments.
Charlie. Yes, Warren is right that interest rates are very important in determining the value of stocks, and I think he is also right that gold is very less important . The second part of the question, thank you sir. This is the second part of my question. Um, given your expectations on gold, um, if you consider that the dollar will fall 40% or more in value against gold, um, and given the positive relationship to the dollar's decline in the 1929-48 and 64-81 periods and the negative relationship in the other two periods that you studied .
Would you adjust the 7% total annual return you expect for common equities over the next decade ? And along with that, would you say anything about your expected rate of return on other major asset classes like bonds, real estate ? And which do you believe provides the best value for investors? Thank you very much.
Except in extraordinary circumstances, my estimate on things like bonds is whatever the bond is yielding at the time . I don't think I'm smarter than the bond market. Now, when all those rates change , you could say that my expectations will change too, right? The answer is almost certainly yes . That means I don't know what the right rate is for bonds.
I think I would be very careful about financial relationships . I mean, I spent many years wasting time on such things. And I, I saw stock prices connected to everything in the world. And, the problem is that when I did find a relationship , it was useless . I mean, you know, you see things like this about whether the AFC or the NFL will win the Super Bowl.
You can find something that relates to anything, but ultimately, a business or any financial asset is only worth as much as how much cash it generates over its lifetime . If you own an oil well, a farm, or an apartment building , what matters in the case of an oil well is its lifespan and how much you can get from it .
Maybe you can use secondary or tertiary recovery methods, but whatever, it's equal to the discounted value of the oil that comes out. Then you need to make an estimate of its size and price. In the case of a farm, you estimate crop yields, costs, and crop prices. In the case of an apartment building, you'll be estimating rents, maintenance costs, how long it will last, and when new apartments will arrive that tenants will want in the future .
But investing is just spending some money now to get more money back in the future . There are two ways to look at getting the money back. One is what the asset itself produces . That's the investment. Second, regardless of what the asset produces , how much someone else will pay for it in the future ; I call this speculation.
So if you focus on the property itself, you don't care about the market price, because that property generates money for you and investing in that property provides the same to society. Another way is: to see how much someone would pay for it tomorrow , even if it's worthless. That is speculative investment, and it will not benefit society in any way.
Ultimately, one group benefits at the expense of another, which happened on a large scale in the financial bubble that came along a few years ago . There are many things that produce nothing , but there has been a huge transfer of wealth in a short period of time . As investments, they are a disaster.
They have been wonderful for some as means of transferring wealth , but they have become a disaster for those on the other side of that transfer. We are not concerned with its market price because we only look at the property , we do not buy it with the intention of selling it to someone else and making a profit.
We'll see what that business produces itself. We bought See's Candy in 1972 . Its success was made possible by the cash flow it generated later. I call the brokerage house every day and ask, "How much is See's Candy stock worth ?" It doesn't depend on what you ask. And our approach to interest rates is the same .
I don't get it right. I bought some REITs a few years ago because I thought they were cheap. Why did I think they were available at a low price? Because I thought those companies could give me an 11 or 12% return on their assets, and I believe that an 11 or 12% return is attractive . Now those REITs are selling at higher prices and, you know, they're not as attractive now as they were then.
But you have to look at every asset class, every business, every farm, every REIT, whatever it is, and see what it can produce over time, that's its value. It may occasionally sell at very different prices , but that doesn't mean one person is taking advantage of another , that's not our game. Charlie, yes.
What makes it difficult to predict common stock prices is that a general liquidity market for common stocks occasionally creates gaps in market sectors or in the overall market . A Ponzi scheme. In other words , people get attracted to it because it worked last month or last year, which causes it to reach very ridiculous levels, and those levels can continue for a long time.
Trying to predict such things. A kind of Ponzi scheme, if you will, where common stocks would unexpectedly drop in value through the forces of life. By definition, it is very, very difficult to predict. That's why it's so dangerous to short stocks even when they're overvalued. It is difficult to know how much they will become overvalued, in addition to the existing overvaluation.
And I don't think you can predict the impact of a Ponzi scheme in the markets by looking at the price of gold or any other relationship. Charlie and I mean, you're pulling a number out of thin air. We probably agreed on at least a hundred companies, maybe more, that we thought were fraudulent, like bubbles.
And if we had acted by shorting them for years , we might have gone bankrupt by now . But what we said a hundred times over is almost true. It's very difficult to predict how far the Ponzi scheme Charlie calls it will go. This is not exactly a scheme, because it is not designed by one person in most cases .
This is a natural phenomenon, seemingly encouraged by promoters, investment bankers, and venture capitalists . But they're not all sitting in a room planning this. It creates a momentum based on human nature , and eventually it explodes, no one knows when. That's why you can't short , which means in our view, it doesn't make much sense to short such things.
But, it is possible to identify them. You know when you're dealing with crazy things like that, but no one knows how far they'll go or when they'll end . Those who think they know sometimes participate in it, while others learn how to profit from it . There is no doubt about it. Seeing such times, you don't need an IQ of 200 to know how to transfer wealth from others to you, which has happened on a massive scale in recent years. This is not such a great thing in capitalism.
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