Buffett Says for Many Companies,Wealth in Recent Years Is a Mirage
Dow Jones Newswires
OMAHA -- Famed investor Warren Buffett likened current speculation on
Wall Street to a chain letter in which the early signers-on often make
money, but in the end more lose it.
Holding forth in what promised to be another
marathon annual meeting before more than 10,000
Berkshire Hathaway shareholders Saturday, Mr.
Buffett said that "bursts in the market ... get
corrected eventually." He said that a company that
in the end never makes any money but changes
hands many times doesn't create real wealth.
"Looking back, you will see this as a period of
enormous amounts of wealth being transferred,"
Mr. Buffett predicted of the current market frenzy.
"Investors gain nothing, but feel richer."
He said it was the same principle as a chain letter. "If you're early on you
can make money."
He said the "manias that periodically take place and not just in stocks,"
eventually blow up. "When you get a huge number of participants playing
with large sums, it creates an appearance of truth," he said. But he added
that he wasn't sure how extensive the fallout from a burst bubble eventually
would be -- whether it would affect a single sector or the entire economy.
"In five or 10 years we'll know," he said.
Asked the predictable question -- why Berkshire doesn't invest in
technology stocks -- Mr. Buffett said, "We have no religious belief that we
don't buy into technology companies. But we've never found one where
we think we know what the business will look like in 10 years."
He also said he was unsure what threats and opportunities technology
would bode but "it will become an increasingly important issue on how it
affects our businesses."
Noting that among Berkshire's properties is the Buffalo daily newspaper,
Buffalo News, he said, "Newspapers are a category that is very threatened
by the Internet." He said the Internet had a distinct advantage over
newspapers in that it had virtually no delivery costs. He also said that in
"not too many years" the newspaper would look "very very different"
because of the Web.
As a result, he said he was "puzzled" over what some people are paying
for newspaper properties today. "They have their billfold in the past," he
said.
Mr. Buffett also predicted that the Internet will have a significant albeit
uncertain impact on Berkshire's various retailing businesses. "They are all
threatened one way or another by the Internet," he said.
Mr. Buffett and his sidekick, Berkshire Vice Chairman Charles Munger,
also dispensed considerable cautionary advice to the rapt audience about
current high stock prices and market valuations.
"We've seen a lot of cases where valuations on the high side are
unbelievable," Mr. Buffett said. As a result, he said it makes finding the
bargains that he and Mr. Munger are famous for discovering ever more
difficult. "We don't see any great cases of dramatic undervaluation in this
market," Mr. Buffett said. He said with "so much money sloshing around" it
makes many companies prohibitively expensive.
He and Mr. Munger also criticized the high paychecks some senior
executives are taking home. "What happens on the top level is really
unbelievable," Mr. Buffett said, adding that the primary pay gap these days
is between the rich and the super-rich. "It's motivating a lot of
compensation," he said.
Mr. Munger, who punctuated his remarks with often pithy metaphors,
likened some corporate compensation today to "putting a rat colony in a
granary." Obviously the two thought shareholders were being poorly
served by such compensation packages.
They also indicated they thought there was a high degree of risk in some of
the stock option plans currently proliferating on Wall Street. Mr. Buffett
said he thought many of those receiving those options "inherently know
they have a lottery ticket."
Mr. Buffett noted the extremes in some company market valuations today.
He said some companies may have a market cap of $10 billion but would
be unable to borrow even $100 million if they went to the bank. Yet their
individual owners could borrow 20 times that amount. Of such imbalances
Mr. Buffett said, "This is as extreme as anything that has happened --
including the 20s." Mr. Munger called it the most extreme event in modern
capitalism.
Mr. Buffett called the current situation "precautionary to us" as professional
investors. "It does not spell opportunity." But, he said, "The ability to
monetize share holding ignorance has never been exceeded." |
