Warren Buffett recently gave a rare interview with journalist Charlie Rose, where they cover a wide range of interesting topics such as index investing, why he is so happy when stock prices fall and what characterizes an excellent CEO.
The interview is no less than five quarters of an hour long, so if you need to prioritize, I would suggest listening to just the first half hour. This is followed by a number of less concrete topics that many will have heard Buffett talk about before (developments in the US over the last 100 years, the virtues of capitalism, the biggest threats, etc.)
Below you can read my key take-aways and watch the full interview.
I'm happy when prices drop
When asked what makes Buffett happy, he is quick to answer: I know I’m going to win in the long run – and when stock market prices fall.
Both points cut to the core of Buffett’s investment philosophy. He is a ‘buttom-up’ investor in the strongest sense of the term. He analyzes and co-owns companies. Not sectors, geographies or more macro trends. He spends many years studying the companies that meet his criteria, and he only buys when the price is a reasonable amount below fair value – i.e. has a ‘margin of safety’. This gives him a safety margin in case he makes mistakes in his analysis or if unforeseen events suddenly arise.
If we take this approach, experience shows that the stock market will reward us. Maybe not in 3 weeks or 3 months, but most likely in 3 or 5 years. And if we continue with this strategy, compound interest will make us very wealthy over time. It’s a rational approach – we should do what we can to co-own companies that continuously create value, so time is on our side.
The second point, that he loves it when prices fall, is based on two main assumptions: Firstly, he has a list of companies he follows and either already owns or wants to own. When the price drops to the right level, he’s ready to buy up. However, this is only possible if you have a reasonable amount of cash or similar easily realizable assets (e.g. short-term bonds). Here we come to the second reason. It’s something Buffett always has in abundance, and he’s willing to accept a lower return in the short term by not being fully invested. Typically, he has 15% of Berkshire’s total value in contacts. When opportunity knocks and sellers stand on each other’s shoulders to sell, Buffett is like a little boy in a candy store.
As Buffett says: Every once in a 10- to 20-year period, a unique opportunity arises that we should have prepared for long in advance. We don’t know in advance when it will happen – or why – but history has taught us that the opportunity will come; think of the 9/11 attacks, the financial crisis or pandemic/covid-19.
Host: What do you need [to be a good investor]?
Buffett: You need the right orientation. You know 90% of the people… I’m pulling a figure out the air, but 90% of people that buy stocks, don’t think of them the right way. They think about something they hope goes up next week, and they think about the market or something they hope goes up and if it’s down they feel worse. I feel better.
Host: And what do you think about?
Buffett: I think about what the company’s going to be worth in 10 or 20 years from now and I hope it goes down when I buy it because I’ll buy more.
Invest in indices - but stick to the S&P500
In the interview, Buffett repeats one of his oft-quoted recommendations: The ordinary investor should buy the S&P500 index rather than finding individual companies. But this time, the recommendation also comes with a warning. He literally means the S&P500, not all sorts of other index funds. Today, there are a plethora of index funds to choose from based on everything from sectors to geography and company size. So many, in fact, that choosing the right fund(s) can be as difficult as choosing individual companies. Therefore, Buffett recommends that we keep it simple and buy the 500 largest US companies through the S&P500. No more, no less.
In a Danish context, this is equivalent to buying the European market, which in practice means EURO STOXX 50 (e.g. via Black Rocks’ iShares or Vanguard). However, because the market is significantly smaller than the US market, it would make sense for a Danish investor to invest half in the S&P500 and half in EUROSTOXX. This would give a very broad exposure to the US and European markets, be very simple and require a minimum of effort and insight. A setup that will actually give a better return than the vast majority of active investors who buy individual companies.
What makes a good CEO?
When it comes to the question of what qualities Buffett believes a great CEO should possess, the short answer is: “Ability, trust and character”. On a cheeky side note, these are probably the same qualities you should look for when looking for a spouse.
In other words, a CEO must
- be good at what they do – are they technically savvy and have they led other successful companies?
- Be trustworthy – do they talk openly and honestly about their successes as well as their failures?
- have enough character to manage a large organization, yet change your mind when the counter-argument is strong enough?
As examples of CEOs who possess these qualities, Buffett cites Jeff Bezos of Amazon and Tim Cook of Apple. To this list we can add the CEOs that Buffett has indirectly selected by buying a stake in Berkshire’s equity portfolio (see the current one here). A good recommendation from Buffett is to read the annual reports of companies with great CEOs. Even if we don’t own the companies ourselves. Some of the most interesting CEOs even write a ‘letter to shareholders’ like Buffett himself does, where we can read their reflections on the past year and why they made their respective decisions.
Vintage 1930 and still going strong
One of the slightly surprising (and somewhat annoying) aspects of the interview is that Buffett repeatedly interrupts the host, declines to answer questions and generally controls the interview quite a bit. On the one hand, this means that we as listeners don’t get a few interesting questions answered, but at the same time it also shows a Buffett who is clearly still sharp and able to take charge. At an age when most of us would be happy if we can read the daily newspaper and drink our morning coffee without spilling (Buffett is 91 years old). As a longtime Berkshire shareholder, I continue to feel in safe hands.
Warming up for Berkshire Hathaway's annual meeting
Finally, an invitation to attend the upcoming Berkshire Annual Meeting, where we will hear much more from Buffett and his partner Charlie Munger (aka ‘the abominable no-man’). The vast majority of the meeting is their Q&A session, where the two investment gurus answer questions on everything from specific investments to their life philosophy.
For those of us with a penchant for fundamental/value investing, it’s one of the highlights of the year – and it’s free to attend!
The show can be streamed for free on CNBC on April 30, 2022 here: Berkshire Annual Meeting on CNBC
