Warren Buffet Speaks
Berkshire-Hathaway held its annual shareholders meeting this past weekend, and even if you're not a hedge fund manager, Warren Buffet's opinions are still worth considering. A reporter from SeekingAlpha took some notes during the discussion, documenting the wisdom of Buffet and his right-hand man and Vice-Chairman, Charlie Munger, on issues ranging from human fallibility to global warming. Here are four of the most interesting views:
Corporate profits: Corporate profits today are extraordinary and not sustainable. Over time, corporate profits have averaged 4%-6% of GDP. Today it is 8%, and that will come down. Much of today's profits are being derived from the financial sector.An especially salient point is that "people have a hard time thinking about what hasn't happened in the past." The business environment changes so rapidly that expectations based on past events are becoming less and less useful. To check out more of SeekingAlpha's notes on the views of Buffet and Munger, visit this Web page.
Human fallibility: People have a hard time thinking about what hasn't happened in the past. Thus, they tend to incorrectly discount events in the future. On desired hurdle rates, it is amazing how gullible big investors, such as institutions, are. They are willing to believe and invest with people who will tell them what they want to hear, even if those people cannot deliver the stated hurdle rate.
Volatility as a measure of risk: Volatility is not a measure of risk. The people who teach risk in universities do not understand risk. Beta does not measure risk. Warren gave the example of farmland in Nebraska in the early 1980s, which he purchased at $600 an acre. Two years earlier, it was selling for $2000 an acre. However, when farmland was selling at $2000 an acre, its beta was lower. Thus, according to financial theory, farmland was less risky at $2000 an acre than it was at $600 an acre. Volatility as a measure of risk is nonsense.
Global warming: There is enough evidence to suggest global warming is occurring. General Re is taking it seriously. Charlie Munger chimed in, however, that "you'd have to be a pot-smoking journalism student to believe global warming is a threat to the existence of mankind." What matters are the dislocations that will occur due to global warming, not global warming itself. People generally like it warmer. After all, people aren't moving from Southern California to North Dakota.
(Painting of Warren Buffet by Erin Crowe, posted by Peter Duhon, CC 2.0)