The annual charity auction for a lunch with Warren Buffett concluded recently. Certainly, there are much to learn from picking Buffett’s brain.
Unless you have US$2.68 million lying around to pay for the lunch, this article is your next best bet. After the lunch, Buffett took an interview and these are the four things we learnt this year.
1. On Bank of America deal
As Bank of America increased their dividend payout of its common stock, Buffett exercised his option to swap his preferred stocks into common stocks.
When asked if he made the swap because the deal is attractive or if the bank is attractive, Buffett said that exercising his option makes sense as the dividends of the common stocks is higher than the preferred stocks.
However, he not only liked the deal, he liked the bank too. In the Bank of America investment, you can see Buffett’s principle of buying into a great company at a cheap price.
Buffett first cut a deal with Bank of America in 2011 when the bank was dealing with some legal issues following the mortgage crisis in the US.
Looking back, he compared Bank of America to a great athlete which got into an accident and is waiting to get back into shape.
He expressed that Bank of America is a sound company and has a sound management which should do fine for now. They will perform even better if interest rates go up.
Given the Bank of America’s track record, Buffett expects the share prices to go higher as they were to repurchase shares.
2. On IBM mistake
In his interview, Buffett said that he made a mistake and it is part of the game. The mistake he was referring to was IBM.
He expressed that Amazon did a great job with the cloud and he was given a huge runway by tech companies including IBM which was the mistake.
Amazon’s Jeff Bezos received a compliment from Buffett; “Jefhaszos have a big lead and you don’t want to give a smart fellow a big lead”.
When describing the tech firms, he said that they are a group of smart people with a lot of resources.
3. On finding sensible investments
Buffett’s Berkshire Hathaway is currently sitting on around US$100 billion of cash and equivalents. He would like to invest all of it into the stock market but is having trouble finding sensible investment.
Stocks are not going to earn more because you paid more. Although stocks are not as attractive as they are used to, it is still more attractive as compared to bonds given that a ten-year US bond is at 45 times earnings.
The difference between stocks and bonds will be less dramatic when interest rate increases. When describing the relationship between stocks and interest rate, Buffett claimed that it is like what gravity is to matter.
If interest rate is low or zero, investors will be buying into assets that yields them 1.0% to 2.0%. If interest rate is high such as the 21% in 1980s, stocks will look unattractive at a six times price-earnings.
When asked about his thoughts about interest rate, Buffett said that interest rate drives asset prices and it remained low for a period longer than he thought.
4. On Federal Reserve, European Central Bank and Bank of Japan
As the Federal Reserve, European Central Bank and Bank of Japan expressed that they will be cutting their quantitative easing and raise interest rates, Buffett said that they must be careful on how they do it.
Using the Federal Reserve as an example, they are holding about US$4.5 trillion in assets of which only US$1.7 trillion to US$1.8 trillion are US treasuries.
Leaving them out, it will imply that there is almost US$3 trillion worth of maturing securities that they will not be taking up.
Buffett was asked on his thoughts if quantitative easing has worked. He said that it did wonders in 2008 and that the recovery would have been difficult and different should there have not been quantitative easing.
However, he warned that transition remains tricky as the Federal Reserve has not done it before.