Warren Buffett: Just Looking At The Price Is Not Investing | CNBC

Summary

In this interview, Warren Buffett, Chairman and CEO of Berkshire Hathaway, discusses the return of market volatility and its impact on investors. He emphasizes the importance of viewing stocks as parts of businesses rather than just price movements, and advises against borrowing against securities. Buffett also addresses the role of interest rates in determining stock values, comparing stocks to bonds with 'invisible coupons' that represent future cash flows. He suggests that despite market fluctuations, equities remain a good investment, especially when compared to bonds in a low-interest-rate environment.

Takeaways

• 📈 Warren Buffett emphasizes that market volatility is a natural occurrence and should not deter long-term investors who focus on the underlying value of businesses.
• 🏛 He compares owning stocks to owning a farm or an apartment house, suggesting that daily market fluctuations should not affect the intrinsic value of these assets.
• 💹 Buffett warns against borrowing against securities due to the unpredictable nature of markets, where anything can happen, including extraordinary events that could close markets.
• 🚫 He criticizes complex financial instruments that are not well understood by the public, which can lead to unnecessary risks and losses.
• 💰 Buffett advises investors to focus on the business fundamentals rather than short-term price movements, which he likens to gambling rather than investing.
• 🏢 He discusses the concept of 'coupons' in stocks, which represent the future cash flows that businesses are expected to generate, and how these are more valuable when interest rates are low.
• 📉 Buffett explains that stocks are more attractive when interest rates are low, as they offer higher potential returns compared to bonds with fixed interest payments.
• 📈 He points out that good news, such as a strong jobs report, should not be a cause for concern about rising interest rates, but is often misinterpreted by the market.
• 💬 Buffett acknowledges the psychological difficulty of investing for many people, suggesting that education on what they are truly buying can help.
• 🔒 He suggests that some people are not suited to own stocks due to their emotional reaction to price fluctuations, and that they should consider their psychological fitness for investing.

Q & A

What is Warren Buffett's perspective on market volatility?

Warren Buffett suggests that if you own stocks as if you own a farm or an apartment house, you don't get a quote every day or week. Instead, you look at the business and its value, which depends on the cash it delivers to its owners over time. He implies that the value of American business does not change significantly in a short period like two months.

Why does Buffett think some people get scared by market volatility?

Buffett explains that market volatility can be scary because anything can happen in the markets, and they don't have to open tomorrow. He also mentions that some complex financial instruments that people don't understand well can contribute to the fear, especially when they are used for gambling rather than investing.

What does Buffett advise on investing in businesses?

Buffett advises that when investing in a business, one should look at how the business performs rather than just the price of its stocks. He uses the example of buying a McDonald's franchise to illustrate that the focus should be on the business's performance and not on short-term market fluctuations.

How does Buffett view the use of complex financial instruments like those tied to the VIX?

Buffett is critical of complex financial instruments like those tied to the VIX, stating that they are unnecessary and often used for gambling rather than investing. He believes that these instruments can lead to significant losses and do not align with the concept of investing.

What is Buffett's opinion on borrowing money against securities?

Buffett warns against borrowing money against securities because markets can be unpredictable. He emphasizes that markets don't have to open tomorrow, and extraordinary events can occur, which could lead to significant financial risks.

Why has Berkshire Hathaway been a net purchaser of equities in 2018 according to Buffett?

Buffett indicates that Berkshire Hathaway has been a net purchaser of equities in 2018 because they are finding good deals in the market. He believes that you can buy small pieces of businesses for less than what it would cost to buy whole businesses.

What is Buffett's view on the relationship between interest rates and stock prices?

Buffett compares interest rates to gravity for stock prices, stating that when interest rates are low, stock prices tend to climb. He explains that stocks are like bonds with uncouped coupons, and their value is determined by the cash they will generate over time.

How does Buffett feel about the advice given to retail investors regarding stock and bond allocations?

Buffett questions the common advice given to retail investors about having a certain percentage of their portfolio in bonds. He suggests that some people are not emotionally or psychologically fit to own stocks and should be educated on what they are truly buying, which is a part of a business.

What does Buffett think about the psychological aspect of investing?

Buffett acknowledges that investing is not easy psychologically for many people. He mentions that some people prefer to gamble and seek quick riches, which is not a sound investment strategy. He also notes that educating investors on the true nature of what they are buying can help.

Why doesn't Buffett use Twitter, and has he ever considered it?

Buffett admits he has never tweeted and does not know how to use Twitter. He finds the constant stream of information overwhelming and has not seen the need to participate. However, he playfully entertains the idea of tweeting during a game if he were to attend with the interviewers.