Peter J. Thompson, National Post(See hardcopy for Photo Description)
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After an interview with the Financial Post, Warren Buffett, chairman of Berkshire Hathaway Inc., yesterday answered questions from some of Bay Street's top investor relations professionals. He shared more on his views on the markets, politics and the economy.
Q What are your views on the credit crunch?
A Credit has been repriced, but it has not become unavailable. There is repricing of risk and an unavailability of what I might call "dumb money," of which there was plenty around a year ago.
We first noted it big in the mortgage field. You had a situation a couple of years ago where virtually every American believed that house prices would do nothing but go up. If you've got every American believing that about any asset class, they're going to get more and more enthused about it, and borrow more and more money against it. And the lenders believed it, as well. And then you had Wall Street repackaging mortgages into unfathomable instruments that people bought to get a little bit extra yield, and now we are finding out what they own.
You've had the same thing in corporate finance, in what used to be called "LBOs," but has taken on a name with somewhat less stigma, "private equity." All of a sudden, the mortgage thing is starting to spread to some pretty big institutions.
I've said in the past, it's only when the tide goes out you see who is swimming naked. Well, the tide is now out, and it's not been a pretty sight.
Q You made a bet against the U.S. currency. The dollar's come down substantially. Where do you see it going now?
A At Berkshire, at the peak we had about US$22-billion of foreign-currency positions -- some of it was in the Canadian dollar, and I want to thank everybody here. There's no royalty though.
We have tried to emphasize businesses with earnings in other currencies --Coca-Cola, for example. That, to me, would be a superior way to bet on other currencies.
The only currency we hold now is the Brazilian real. If you grew up like I did, then having a holding in Brazilian currency you would have been committed someplace. In the last 100 years, five Brazilian currencies have gone to confetti. Wealthy people in a country like that would often stash their currency in another country like Switzerland or some place like that.
In the last five years the Brazilian real has doubled in value against the U.S. dollar, so if you were a Brazilian and you put your money in the American dollar, you lost half your net worth in your home country. And the outstanding thing about that is that during much of that period the Brazilian central bank was supporting the U.S. dollar.
Insanity consists of doing the same thing over and over again and expecting the same result. In the United States the cause, in my view, of the declining dollar is the current-account deficit, and the trade deficit being the biggest part of that.
We still, in the United States, are force-feeding about US$2-billion to the rest of the world. People will become a little reluctant over time to continue holding dollar-denominated assets. In the future, I would predict that the U.S. dollar will decline. I don't know what it will look like in the short term, but force-feeding the rest of the world US$2-billion a day is inconsistent with a stable dollar.
Q You mentioned earlier that you watched the U.S. primaries on the Internet and television. How do you think it will play out and what do you think of George Bush's legacy? A I think I'll let the historians speak to that. My tax returns are open for three years.
I think we've got some very interesting and good choices. John McCain, and either Barack Obama or Hillary Clinton. I don't agree with John McCain on a number of things, but I think he's an outstanding human being. I don't think you could have a more first-class individual on the Republican side.
I will be supporting a Democrat, and I will be supporting either Barack or Hillary. I think they are both outstanding candidates. Way before either declared I told them in separate conversations that I would support them if they ran for president. A lot of men have got in trouble for saying the same thing to two different people. I'ma political bigamist at the moment.
But I would feel terrific about either of them. They are looking for the same kind of society in the future as I am.
John McCain I don't agree with on some positions but I would not worry at all about having a classy human being in the presidency if John was elected president.
Q It seems like short-term borrowing costs are almost nil. What's your view on inflation and whether the Fed is doing the right thing?
A The fed has to balance a couple of things. I would not second-guess the Fed; they have a tough job, they can't win every war. They are focusing on expansion right now and they probably have some problems with inflation.
I was asked a couple of years ago [that] if John Kerry gets elected and asked you to be chairman of the Fed, what would you say? And I said I would tell him to ask Jimmy Buffett. Not a job I'd love. The inflation problem, in my view, is very real.
If you build up more and more debts outside of the country and you really do send a couple of billion dollars a day out, and people are left to take IOUs around the world, the natural tendency is a lot of people are not going to want to take them back in currency that is less valued than the currency where the country borrowed the money.
I would say that inflation has been more or less in remission. It never goes away as long as you have politicians and the desire to print money to temporarily solve their problems. I wouldn't be surprised if it becomes more of a factor again.
Q What is your general advice for public investors in turbulent markets?
A Most investors are not going to spend the time to be able to evaluate businesses themselves. My job is evaluating businesses. That means evaluating the management that goes with them, the economic characteristics of the business they are in, where they are likely to be in five or 10 or 20 years.
I'ma professional asset-allocator, a professional investor. Just as in other fields, you shouldn't try to compete with the pros. That doesn't mean you can't become one yourself, if you want to spend the time and effort to do it. But, fortunately, there's a perfect alternative, which basically is to buy an index fund, or the equivalent of an index fund, with very low costs, and not throw all your money in at one time. So you're diversified both in businesses and in time in which you invest. And you'll get a very decent result.
You won't get a result as [a professional investor]. And that means, you don't even think about it. If you buy a farm as an investment, do you sit there and watch the Farm Channel on television all day, as they tell you corn went up a penny or something like that? You buy the farm and figure it is a good investment over a period of time.
But in stocks, you have so much information thrown at you all the time. You have it in print, you have it on the tube, so you think you have to do all these things all the time or form opinions. The truth is, you don't have any business-forming opinions and you don't need to. All you have to do is sit there and ride a good asset over a long period of time.
The Dow Jones [Industrial] Average started the 20th century at 66 and it ended at 11,400. That is not a bad train to be on. How could anybody lose money on something that went from 66 to 11,400? Well, a lot of people lost a lot of money in stocks because they come in at the wrong time, and they get out at the wrong time, and they buy the wrong things, and they get excited, and they get greedy when others get greedy, and fearful when others get fearful.
I say you should get greedy when others are fearful and fearful when others are greedy, but that's hard for most people to do.
It is much easier to buy and buy and buy little pieces of a wonderful group of American businesses, and you'll do fine over time and you'll keep your costs low. If you try to be a little bit smarter, you'll probably end up being a lot dumber.
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