Six days was all it took for the S&P 500 to tumble more than 10% by late last week. That’s the quickest correction in history, according to Deutsche Bank Global Research. The fact markets had one of their worst weeks since the GFC may seem shocking to investors. But iconic investor Warren Buffett asks: “How can it be bad news?”
“My reaction is that I like to buy stocks, so I don’t wish ill on anybody else. But if they want to sell them to me cheaper, I prefer it.”
No matter how gut-wrenching, Buffett says that investors should treat their stocks like a house – what matters is the 10, 20 and 30-year outlook, not any given week's headlines. Following the release of his annual letter (which we covered here), Buffett sat down with CNBC’s Becky Quick to discuss the recent sell-off and share his wisdom on how investors should manage the situation. Read on for some of the highlights from the interview (the full video and related articles can be found at the bottom).
A good buying opportunity
Quick: For people who are just waking up, they’re tuning in and they want to know what you think about this sell-off this morning. To see the Dow down 700, 800 points in the morning, what’s your reaction when you see something like that?
Buffett: Well, my reaction is that I like to buy stocks, so I don’t wish ill on anybody else. But if they want to sell them to me cheaper, I prefer it. So that’s you know, roughly a 3% decline or thereabouts. I don’t know how many 3% declines I’ve had in my lifetime but there have been a lot of them. And I can’t think of one that you shouldn’t have bought on. But if there’s something – if you like to own American businesses, you’re getting a chance to buy it 3% cheaper. I don’t consider that a lot cheaper. I mean, but how can it be bad news unless you have to sell stocks? Now if you have to sell them for some reason, you’re worse off. If you don’t have to sell them, I mean, somebody can come around and offer you a quote on your house today. And it could be 2% less than they offered you yesterday. But if you like the house it really doesn’t make any difference to you.
Coronavirus hasn’t dented the long-term outlook
Becky: What are your thoughts on what’s happening with the coronavirus, if this is a reason to panic and if you were worried about this?
Buffett: I don’t know if I have any special thoughts beyond the news on the coronavirus. The very first day I bought stocks was 12 March 1942. And the stocks were down about 2% that day as it turned out. If you’re buying a business and that’s what stocks are, businesses, in fact, people would be better off if they say, “I bought a business today,” not a stock today because that gives you a different perspective on it than presumably if you go out and buy a farm, if you buy an apartment or a house. If you buy a business, you’re going to own it for 10 or 20 or 30 years. And the real question is has the 10-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours? I do think that not only our businesses but American business generally will be doing fabulously better 30 years from now or 20 years from now.
You’ll notice many of the businesses we own - partially own, American Express (NYSE:AXP), we’ve owned it for 20 years, Coca-Cola (NYSE:KO), we’ve owned it for 40 years-- but those are businesses. And, you don’t buy or sell your business based on today’s headlines. And, if it gives you a chance to buy something that you like, and you can buy it even cheaper then you’re in good luck basically.
Becky: It may not change things over the 5 or 10-year span of things. But if I think I can buy something for potentially 10% cheaper, maybe more than that if I wait a week or a month, maybe that’s what I’m sitting around for, how would you look at that?
Buffett: Well, if you think that then you’re going to get fabulously rich if you’re right. All you have to do is just keeping buying in ten-day intervals and keep making your ten-day prediction. If I knew what the market was going to do obviously, but you don’t and I don’t think anybody knows what the market’s going to do. I think you do know whether you’re making an intelligent purchase at a given price.
Trouble is always coming
Quick: Charlie Munger, vice chairman at Berkshire Hathaway had his daily journal meeting just a couple of weeks ago. And at that meeting, he said that there’s a lot of wretched excess out there and that there’s a lot of trouble coming as a result. Do you agree with that?
Buffett: There’s always trouble coming. Yeah, there was trouble coming in 1942 when I bought that first stock. All kinds of trouble. The Philippines were going to fall pretty soon. There’s all kinds of trouble; in 1949 there was trouble - certainly trouble in 2008 when I wrote an article for The New York Times. I said, “Trouble is coming.” But I said, “Buy stocks.”
Quick: Would you repeat that this time, if trouble’s coming would you still say buy stocks right now?
Buffett: I would say buy stocks if you get enough for your money. You know, we buy a few stocks. But we don’t look at - we’re not buying the stock market. We’re saying I am buying, say, American Express. We own American Express. There’s 815 million shares out. This morning it was $126 or something like that, so it’s selling for roughly $100 billion. Now the real question is whether the company’s worth more or less than $100 billion. It isn’t what the stock is going to do tomorrow or next week or next month.
Stocks are better than other alternatives
Becky: What you hear today which we’ve been hearing for a while is TINA (there is no alternative). Right? You have to buy stocks because bond yields are so low because interest rates are so low.
Buffett: Well, if you look at the present situation, we’ve talked about this before, that you get more for your money in stocks than bonds. That doesn’t have to be the case. I mean, but it’s usually been in the case in America. If you buy a 30-year bond today with a yield of 2% you’re paying 50 times earnings for an investment where the earnings can’t go up for 30 years. Now if somebody said to you, “I want to sell you a stock that’s at 50 times earnings. The earnings can’t go up for 30 years,” you’d say that doesn’t sound very good. Stocks are way better than 30-year bonds. I mean, that’s clear. People really have three basic alternatives, short-term cash which is an option of doing something later, long-time bonds or long-term stocks. And stocks are cheaper than bonds.
Watch the full interview
(Ed's Note: This is a really enjoyable watch if you have the time and covers a whole host of other topics including Buffett's views on breaking up Berkshire; the low-interest rate environment; Berkshire's holdings in U.S. banks and airlines, and the 2020 Presidential Race.)
- Check out our coverage of Buffett's 55th annual shareholder letter which includes his 15 top stock holdings
- Patrick Hodgens shares Buffett's sentiment on long-termism in his article 'The Big money is made in the waiting'
- But another perspective can be found in my colleague Patrick Poke's write-up 'How to invest during a global pandemic'
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Keep buying, Thats easy for a multibillionaire to say. If his portfolio halves, so what, he'll cope fine with 40 billion instead of 80 billion !
Issue here is that many people can't cope and can't afford to lose 10% in a week, or 50-60% in a year. Many people don't have 20 year investment time horizons either. The reality is that there are other alternatives to managing money than buy and hope that inflated asset values don't come back to bite you. Risk management and the avoidance of catastrophic losses (we're not talking a few per cent losses here) is incredibly under-appreciated, and very important in reality. Talking just about long term returns ignores the path to get there and doesn't consider whether that path is tolerable to the client. If you can't stay on the path, it is pointless. Furthermore, there are very good reason to think that long term returns will be much lower than they have been historically. While asset classes can be bid up - as they have been - that only reduces likely long term return prospects, in many cases to trivial amounts. Investors should and will look more to genuine alternatives to low yielding cash and bonds and risky equities, to better meet their own objectives, rather than being completely hostage to what the markets do.
But Carlos he's been doing it all his life ... long before he was a billionaire or for that matter even a millionaire. In a hundred years time people will talk about Buffet in the same way we do about JP Morgan now. He is the Tigers Woods of investors.
Buffett is saying investing is about buying a share of a business that works long-term. In investing he prioritises the business environment, not sharemarket metrics. There will businesses around in 10-20y that have grown even in a slower growth world. All that is happening now re Corona, is the reshuffling of large scale portfolios out of some equities and into cash (or other). Risk management. A 10% even 20% drop in the SM as that is done sounds about right. You should still/always go out and buy a long term business if you can afford to.
Nobody is saying Buffett's holding too much cash now!
Awesome yet so simple advice. Thanks for the article and interview.
An update for readers. The Oracle has followed through on his own advice and bought an additional $45m worth of Delta shares (NYSE:DAL) at about $46.40. The stock is down ~25% since coronavirus.