It is always worth listening to what Warren Buffett has to say – especially about his mistakes
The veteran investor always seeks value, so no wonder he is warning novice investors not to ‘gamble’ on stocks – among other things, writes Hamish McRae
Warren Buffett’s enduring investment principle is to seek value rather than chase fashion. So it is unsurprising that he should warn novice investors not to gamble on the new online trading platforms such as Robinhood.
Answering questions at Berkshire Hathaway’s annual meeting on Saturday he made the point that it is tough to pick winners. Just because an industry was growing did not mean that all the companies in that industry would prosper.
“There’s a lot more to picking stocks than figuring out what will be an incredible industry in the future,” he said. “I just want to tell you that it’s not as easy as it sounds.”
Robinhood, he said “has become a very significant part of the casino aspect... that has joined into the stock market in the last year or year and a half”.
This anti-gambling stance is not new. At the annual meeting three years ago he argued that buying cryptocurrencies such as Bitcoin was more akin to gambling than investment.
The trouble is that this particular gamble has been wildly successful. The price of Bitcoin stood at just under $7,000 at the end of March 2018 when he said that. It has bounced around all over the place since then, dipping to only a bit over $5,000 in March last year – but is now $56,836.
I suppose you could say this proves his point: that this is more akin to gambling than investment. The trouble is that it is, for people who get their timing right, pretty successful gambling. We are in a bull market, with most assets at or close to their all-time highs. (In the UK, the FTSE100 index of large companies has lagged behind other markets, but house prices are up 7 per cent year-on-year and at record levels.) In a bull market it is relatively easy to make money.
So what happens next? I always find the most interesting aspect of Berkshire Hathaway meetings is not what Warren Buffet and his vice-president, Charlie Munger, say about investment in general, but what they say about their own activities. The perspective of two nonagenarians is helpful because once you have seen through several economic cycles you do get a perspective. But what they do is more interesting, because they, like everyone, make mistakes.
They acknowledge a couple from last year. Berkshire Hathaway sold some of their huge holdings in Apple last autumn, and earlier in the year dumped their airline stocks on the grounds that it would take a long time for air travel to come back. But Apple has raced on, and the airlines are now making a comeback thanks to the swift rollout of vaccines in the US.
The big buys they made include their own shares. Buybacks by Berkshire Hathaway were just under $25bn, which is massive. The implicit message is that the group’s own share price undervalues the assets it holds, and that it is positioning itself for some pullback – value will beat fashion at some time in the future. If the US economy continues to thrive, as it clearly will for some months to come, then Buffett is sitting on prime American assets: Bank of America, Apple, Coca-Cola, Kraft and so on. But as and when the mood shifts, then it has a pile of cash, nearly $140bn of it, to pump back into the markets.
The trick will be to distinguish between what is solidly valued and what is "froth". Jerome Powell, chair of the Federal Reserve last week used the froth word. Parts of the markets “are a bit frothy, and that’s a fact,” he said. Of course he did not say which – he is a central banker. But the message is clear enough.
At some stage the Fed will have to be aware of the dangers of that froth, policy will tighten, and that will be the moment when Warren Buffett’s warnings about the dangers of gambling rather than investing suddenly seem prescient. We cannot know when.
All we know is that bull markets often go on for longer than people expect, but then react more suddenly when they do. We also can see that Warren Buffett knows that too.
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