Buffett’s late cycle strategy
We’ve heard a lot from investors around the world about late-cycle investing in recent times. The consensus tells us that the end of the bull market is not too far away, but not absolutely imminent. But what does the world’s greatest investor have to say on the matter?
“We're buying stocks this morning. I'd rather buy them cheaper, but I've been buying stocks since March 11, 1942. I bought them under every president, seven Republicans, seven Democrats. I bought them quarter after quarter.”
In this recent interview with CNBC, Buffett provided plenty of his trademark wisdom. What was a little more unusual however, was his candidness regarding recent Apple purchases. Though Buffett usually stays tight-lipped on the subject, he admitted to buying “just a little” Apple since their most recent regulatory filing. Watch the video, or read our edited transcript, to get Buffett’s latest thoughts on current valuations, Berkshire stock repurchases, airlines, and much more.
Are stocks expensive at current levels?
Buffett: Well, they are ... IF you had your choice between buying and holding a 30-year bond for 30 years, or holding a basket of American stocks, there's just no question you'll do better holding stocks. So, it's considerably more attractive than fixed income securities. That doesn't mean they'll go up or down tomorrow or next week or next year, but over time a bunch of businesses that are earning high returns on capital are going to beat a bond that's fixed at roughly 3% for 30 years. And it's not my field of specialty, but stocks look cheaper than real estate.
Q: Is that the only thing that makes stocks look attractive right now, the comparison with fixed income?
Buffett: Well that's what you have to do in investing. You're sitting with some cash in your pocket, you've had savings, and the question is: what do you do with it? You can buy a duplex next door and rent it out to people and do fine over time, or you can buy a small piece of farmland or something of the sort, or you can put it into something fixed income, bonds or bank deposits, or whatever it may be. And stocks, if you look at American equities, American business is earning a lot of money relative to the capital put in. And the reason stocks are worth a whole lot more than they were 20 years ago or 50 years ago or 100 years ago is, companies have ploughed back part of the earnings. With a bond, you get it back in interest, you get your 3% and that's all you have. With stocks, you get maybe a 3% dividend, but they're ploughing money back, or they're repurchasing shares. And over time that just makes a huge difference.
Q: The last time we talked to you, you said you were still buying stocks. Are you still right now?
Buffett: We're buying stocks this morning. I'd rather buy them cheaper, but I've been buying stocks since March 11, 1942. I bought them under every president, seven Republicans, seven Democrats. I bought them quarter after quarter. Some of the buys were terrific. Some of them weren't at such good times.
"I don't know when to buy stocks, but I know whether to buy stocks."
Assuming you're going to hold them, wouldn't you rather own an interest in a variety of great businesses than have a piece of paper that will pay you 3% in 30 years, or a short-term deposit that pays you maybe 2%.
Still buying Apple
Q: There was a filing that came out not too long ago that showed Berkshire Hathaway was continuing to buy shares of Apple. Have you continued to buy even since that filing?
Buffett: Just a little. About 6 million of the shares are attributable to another fellow in the office that's owned it for a considerable period of time. The rest are in my portfolio. But I bought just a little bit ... I like to buy them cheaper. I mean, it's very difficult. I started buying when the stock was at maybe $100 ... I was buying it as fast as I could. Then I ended up buying some a whole lot higher. I won't name the exact price, but a whole lot higher. I'd rather have it go down. For one thing, if it goes down, Apple's going to buy a lot of stock back. They're already buying stock back.
"If it goes down 10%, it means they get to buy 10% more shares, and my interest will go up 10% more for spending that money and buying shares. So, I am benefited by going down. If I were to talk my book, I would talk it down."
Q: For a long time, Apple was a very volatile stock. It traded in a boom and bust cycle. Every time a new phone that came out, it would push the stock higher. If they didn't have a new release, it would drop. The iPhone is still 65% of Apple’s business, but how do you look at it? Is this a boom and bust cycle, or is there something different here?
Buffett: Not in the least. I like to see the new release do well, but I do not focus on the sales in the next quarter, or the next year.
They won't tell you exactly how many hundreds and hundreds of millions of people who practically live their lives by it. If you look at that little piece of whatever it is, that is some of the most valuable ‘real estate’ in the world. 5th Avenue will never come close to that. You've got hundreds and hundreds of millions of people with loads of buying power, and able to do business or learn information and it's part of their habit of living. I mean they spend hours a day, and it does all kinds of things for them.
So, that ‘real estate’ is worth a fortune. It's nice to have it added to as they sell new phones, and of course a lot of them are replacement phones. They're adding to hundreds and hundreds of millions of consumers that will never get to 5th Avenue. And it’s an indispensable part of their lives.
"It's an extraordinary product."
Q: So, you don't even look at it like a tech analyst would, or like a tech company for that matter?
Buffett: They've got to keep having the product that this huge clientele regards as indispensable. So it's got to be the best thing that can tell to when aeroplanes will arrive, or whatever it may be, what the weather will be, what stocks are doing, play games, whatever it may be. It’s important that their replacement products are looked at as super desirable.
We have a very large retailing operation with Nebraska Furniture Mart. If people went in to buy the latest iPhone or whatever it might be, if for some reason we didn't have it, you couldn't sell them anything else.
They either went next door, which we didn't want them to do, or they came back.
"There was no alternative."
When you have a product that is that personal, that valuable... They talked about the iPhone 10 costing $1000, and isn't that a lot of money? I have a plane that costs me a lot, a million dollars a year or something of the sort. If I used the iPhone (I use iPad) like my friends do... I would rather give up the plane, which is a million or a million and a half a year, for something that costs $1000 bucks. The iPhone is enormously under-priced. Now it's got competition, so you can't push the price, but in terms of its utility to people, and what they get for $1000 someplace else ... You could have a dinner party (for $1000). And here this is, and what it does for you, it's incredible.
Q: Are there airline stocks that you also still find attractive? Have you been adding to your positions there?
Buffett: Well we can't add... I mean technically we could, but I don't want to go above 10%, except in rare circumstances. So, we own nine and a fraction percent of the four largest. I actually have to trim them just a little if they're repurchasing shares to stay under 10%. If I could buy 20%, I would have been happy to buy 20%. So, we've got about what we can handle.
Consumer packaged goods
Q: Campbell's are selling off a couple of units, the fresh foods and the international ... Does that make it more attractive, or less attractive as a buying opportunity for something that could get wrapped in to Kraft Heinz?
Buffett: I don't know that it changes the picture a lot. Presumably they'll get fair value for that. So, those divisions would be calculated by any acquirers as being worth X.
If they have a low tax basis on those assets, then it decreases value a little bit for another buyer, because you've given some of it to the government in the process. But I don't know Campbell’s that well.
Q: Would Berkshire be interested, or would Kraft Heinz be interested?
Buffett: Well Berkshire certainly wouldn't be, but that's partly because we own Kraft Heinz too. But I think it's very hard to offer a significant premium for a packaged goods company and have it make financial sense. The packaged goods business makes high returns on tangible assets that it has. But it is a tougher business than it was 10 years ago, and the stocks are higher than they were 10 years ago. So back in the 80s, we were the largest shareholders of General Foods.
I've always liked brands, and they're very good brands, but in terms of the battle of the retailers versus the brands and the willingness of people to change their habits, it probably has a higher propensity of that than 20 or 30 years ago. So branded packaged goods are a very good business in terms of returns on tangible assets. But they're not a sensational business in terms of where you could be five or 10 years from now.
Buying back Berkshire stock
Q: For a long time, you've said that if it got above 120% of book value, you would buy it back, and that created a floor for the stock. Now, you say that you're throwing that out the window. If you and Charlie look at it and you and Charlie Munger agree on it and you think it's worth it, you'll buy back stock. Have you bought back any stock since then?
Buffett: We've bought back a little, yeah. And we tie it now to intrinsic business value, which we should have done all along, but for a while book value was a good proxy for intrinsic value. It didn't fully describe intrinsic value, but it tracked it. It was a reasonable proxy, and it's gotten to have less and less importance as we move to operating businesses from investments.
So, what really counts is, what are the businesses worth, along with the securities we own, and if it's at a discount to that figure, Charlie and I will buy. And we've bought some.
Q: How often do you and Charlie talk about it?
Buffett: Well we don't have to talk very often, because if it's so close we have to talk every time it moves 1%, it isn't worth buying. So there should be a margin of error in our calculations. So we've never talked day-to-day or week-to-week on it. But I know what's in his mind and I know what's in my mind, we're totally in sync, and we need a big enough discount, so we're buying it at what we know is a price where the continuing shareholders are going to be better off because we bought it. We're running the business for the people who are going to stay, not the ones that are going to leave.
The US economy
Q: What do you see when it comes to the economy and the consumer?
Buffett: Since the fall of 2009 the economy has progressively gotten better. But it started at a very low base, it started from panic. And very soon we’ll have had nine full years of improvement in business, quarter-by-quarter.
Sometimes it’s 1% or 1.25%, sometimes it's 2.5, now it looks even better than that. But business is good across the board.
"Business is good."
It was good two years ago, but it keeps getting better. But the American public household wealth is over $100 trillion, and 250 years ago there wasn't anything here.
Inflation and tariffs
Q: Have you seen any impact on Berkshire's businesses, or higher costs associated with any tariffs that have gone in place?
Buffett: Yeah, there are a few, definitely. And we buy steel we are seeing some effects on that, and we're seeing some effects from inflation.
Q: From inflation?
Buffett: From inflation. We've seen more in the way of cost increases in the last year across all our businesses. But particularly, building materials.
"We sell paint; the can it comes in are a lot more expensive than a year ago."
Q: How much of the inflation is directly tied to the tariffs, and how much is just from an improving economy and inflation you would expect to creep in?
Buffett: I can't tell you exactly yet. It pops up in different places. I haven't really done that ... But I was seeing it in raw materials well before the tariff situation came up. But the tariff situation aggravated it significantly.
Q: If you are seeing price increases that may lead you to the conclusion that you think the Fed should continue to raise rates. Donald Trump tweeted and talked in an interview about how he doesn't like to see the Fed raising rates. What do you think about that as somebody who watches it?
Buffett: I think Jay Powell is a terrific chairman of the Fed. I've known him, not well, but I know people he worked with, and I've listened to what he's had to say. So, I love the fact that Jay Powell is chairman of the Fed, and he will do the right thing.
He gets a lot more figures in than I do. I may get them a little faster sometimes than the Fed… But he will do what, in his judgement, is best for the American economy. There isn't any question about that. Maybe he'll make mistakes. I know I'll make mistakes. But he knows what his job is, and he'll do it.
Q: The president also tweeted that he would like to stop reporting every quarter, maybe do it on a six month basis. What do you think of that idea?
Buffett: Yeah. Jamie Dimon and I came out a while back, but I've always focused on the idea that I like to read quarterly reports as an investor, and we've got a couple hundred billion dollars’ worth of common stock. So I like to get those quarterly reports.
I do not like guidance, I think that guidance leads to lots of bad things, I'm seeing it lead to lots of bad things. I don't think quarterly reporting is the problem itself. It's when you get into promising people what you'll do every quarter. I can't promise what'll happen next quarter.
We're in the hurricane season now, and it could change our earnings dramatically with a storm or something of the sorts. So I think it's a very bad practise to be in the game of earnings guidance, and it is a game. People play it as a game, and then people adjust the numbers and all that. But I like to get the figures quarterly, and I hope that stays.
Q: There was a fake Warren Buffett Twitter account that went from 20,000 followers to 200,000 followers in 24 hours by tweeting out all kinds of pithy sort of sound advice. Folksy sayings that sounded like they could have come from you. Why don't you tweet more often?
Buffett: I just don't see a reason to. I put out an annual report, and I do not have a daily view on all kinds of things. And maybe I've got a guy, and this copycat or imitator, maybe he's putting up better stuff than I would. So if he puts out enough good advice, I'll take credit for it.
Q: We have seen some CEOs who like to tweet very frequently, including Elon Musk. What do you think about people who do tweet a lot?
Buffett: I don't think it's helped a lot. It could be particularly dangerous to certain commenting on Berkshire daily, which I never would do. I won't do it with you. But no, I just think there's other things in life I'd want to do than tweet. I'm not that desperate for somebody to hear my opinion on things.
Q: Do you listen to any podcasts? Do you ever follow anybody else? What other kinds of things do you do with your iPad?
Buffett: I listen to a podcast from my friend, Tom Murphy. Podcasts are normally ... They take a while. I can read faster than I can listen to one. But I recommend that. It was done with David Novak. It was a 28-minute podcast. And anytime you get to listen to Tom Murphy, I think it's terrific. But generally I don't, because of the time element.
Q: What did you learn from Tom Murphy in that podcast?
Buffett: I've been learning from him ever since I met him in 1968 or 9. The very first time I met him ... Tom Murphy, like Charlie Munger, has made me a better person than I would otherwise be. That's the ultimate gift you can give to somebody, and Tom Murphy's given that to me, and Charlie Munger's given it to me, and my dad, my wives, and so on ... But he's a human being that, if you study him ... I'm just talking about business. But just as a human being ... And you want to have the right heroes, and I've had the right heroes, and Tom Murphy's one of them.
MORE ON Education
Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
No areas of expertise