money.cnn.com/2005/05/01/news/fortune500/buffett_talks -> money.cnn.com/2005/05/01/news/fortune500/buffett_talks/
But the atmosphere was warm inside the Qwest Center arena, where roughly 20,000 shareholders gathered from around the world to hear Buffett and h is vice chairman, Charles Munger, answer questions for more than five-an d-a-half hours. Not a single individual shareholder asked about whether Berkshire might b e implicated in the widening scandal about alleged earnings manipulation s at American International Group and even the money managers in the aud ience whose questions touched on the subject approached it gingerly. In his answers to shareholders' questions, Buffett made it clear that he remains concerned about the trade deficit and the US dollar, although he is bullish on the long-term strength of the US economy. But he and Mu nger issued stern new warnings about the residential real estate "bubble ," the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States. They also warned that they do not see a clear future for pharmaceutical s tocks, that GM and Ford face severe trouble over pension and health cost s, that hedge funds could wreak havoc in a market decline, and that the New York Stock Exchange is doing a disservice to investors by going publ ic. As always, Buffett spoke in elaborate paragraphs when replying to shareho lders' questions, while Munger spoke in terse, tart sentences. The two o ften disagree about political and social policy, but for much of this me eting they sounded like identical twins. What follows is an edited and a pproximate transcript of their remarks.
Whether pharma stocks have become bargains On real estate Buffett: "A lot of the psychological well-being of the American public co mes from how well they've done with their housew over the years. If inde ed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive because the company's financial st rength would allow it to buy real-estate-related businesses at bargain p rices .... "Certainly at the high end of the real estate market in some areas, you'v e seen extraordinary movement.... People go crazy in economics periodica lly, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get pric es increasing faster than than the underlying costs, sometimes there can be pretty serious consequences." Munger: "You have a real asset-price bubble in places like parts of Calif ornia and the suburbs of Washington, DC. ft of land, maybe a twentieth of an acre, and the house mi ght cost about $500,000 if you wanted to replace it. So the land sold fo r something like $60 million an acre." Munger: "I know someone who lives next door to what you would actually ca ll a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on." The trade deficit and the value of the dollar Buffett: "That really is the $64,000 question. It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists wi ll still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these....
that go to bed at night with a hair trigger than ever before, it's an electronic herd, they can give vent to decisions that move billions and billions of dollars with the click of a key. "When you have far greater sums than ever before, in one asset class afte r another, that are held by people who operate on a hair-trigger mechani sm, then they lend themselves to more explosive outcomes. People with ve ry short time horizons with huge sums of money, they can all try to head for the exits at the same time. " Munger: "The present era has no comparable referent in the past history o f capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity tha n in any past era. A lot of what I see now reminds me of Sodom and Gomor rah. It has happ ened in the past that there came bad consequences." It's far easier to tell what will hap pen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences. " Munger: "A great civilization will bear a lot of abuse, but there are dan gers in the current situation that threaten anyone who swings for the fe nces." Buffett: "We're like an incredibly rich family that owns so much land the y can't travel to the ends of their domain. And they sit on the front po rch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece. The world has demonstrated a dimin ishing enthusiasm for dollars in the last few years as they get flooded with them every day there's $2 billion more going out than in. I have a hard time thinking of any outcome from this that involves an appreciatin g dollar.
"If you have a good business in this country that's earning dollars , you'll still do OK. Twenty years from now, a couple percentage points of GDP may go to servicing the deficit, but you'll do fine.... I don't t hink trade deficits will pull down the whole place; We have over 80 percent of our money tied to the dollar.
org, you can obtain a tape, free, that the N uclear Threat Initiative has sponsored, that has a dramatization that is fictional but is not fanciful. We would regard as ourselves as vulnerab le to extinction as a company if we did not have nuclear, biological and chemical risks excluded from our policies. There could be events happen ing that could make it impossible for our checks to clear the next day."
for as long as I live , just as I'm going to be buying groceries for the rest of my life. "The stock market works the same way: If I'm a net buyer obviously I woul d rather have prices go down than up. Charlie and I spend no time talkin g about what the stock market is going to do, because we don't know. We don't make a list of the good things that are happening or bad things. This is the most remarkabl e success story in the history of the world. The real worry is what can be done by terrorists or governments that may have ac cess to nuclear or other weapons.... "If you had to make a choice between long-term bonds at around 45 percen t and equities for the next 20 years, I would certainly prefer equities. But if people think they can earn more than 6-7 percent a year, they're making a big mistake. I don't think we're in bubble-type valuations in equities -- or anywhere close to bargain valuations. "If you told me I had to go away for 20 years, I would rather take an ind ex fund over long-term bonds. You'll get a chance to do something extrem ely intelligent with your money in the next few years. But right now the re doesn't seem to be a clear enough direction to conclude anything dram atic."
Bill Ford have both been handed, by past managers, extremely difficult hands to play. They' re not the consequences of their own doing, but they have inherited a le gacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today's world. "Just imagine if they'd been made to sign contracts that made them pay se veral more tons per steel than their competitors have to, people would f eel that's untenable.
You've got a $90 billion pension fund, $20 billion set aside for health-care liabilit ies, and the whole equity value of the company is $14 billion. Some people seem to thi nk there's no trouble just because it hasn't happened yet. If you jump o ut the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. The NYSE's merger with Archipelago Buffett: "I personally think it would be better if the NYSE remained as a neutral, not-for-big-profit institution. T...
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