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Investing gems from Warren Buffett |
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Risk is tied to the type of business and ignorance of the investor. One investor from Los Angeles asked about using volatility as a measurement of an investment's risk. "Volatility does not determine the risk of investing," Buffett said, adding that risk comes with certain kinds of businesses and not knowing what you're doing. A better approach would be to understand the economics of the business you're investing in, he said.
Protect a portfolio from
inflation. "The best protection against inflation is your own earning
power," Buffett says, in response to a question about protecting a portfolio
from the erosion of inflation. He says the next best thing is owning a wonderful
business, adding that owning Coca-Cola or any name that people will always plunk
money down to keep getting and that has low capital investment requirements is
the best investment you can have.
What
can be done about shorting stocks? "I have no problem with shorts,"
says Buffett. He added that he didn't think shorting stocks poses any threat to
the world. He would be fine with it if someone wanted to short Berkshire stock.Are
managed futures funds a bad idea? In response to a question about his stance
on managed futures funds, Buffett said, "It's a mistake to shrink the universe
of possibilities," and that funds devoted to a limited segment are at a disadvantage.
"There's no form that produces investment results." Munger
added that if you averaged out the annual returns of managed futures funds per
dollar per year, they would be somewhere between lousy and negative. How
do you judge the right margin of safety to use when investing? We favor
businesses where we think we know the answer, Buffett said. "If we can't
come up with a figure, we move on to something we can understand." He also
added that the margin of safety doesn't need to be huge, likening a great business
to a fat person. It might be hard to tell whether the person weighs 300 or 325
pounds, he says, but you still would say the person is fat.Munger
chimed in saying that margin of safety comes down to getting more value than what
you're paying.
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Buffett and Munger on other consumer
issues | |
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| • | Gambling
-- a tax on the ignorant. When a shareholder asked about the future of
gambling companies, Buffett remarked that they should do very well, provided that
gambling remains legal. "People like to gamble," he said, adding that
day-trading stocks comes close to gambling. | |
The
fun of gambling aside, the Oracle had harsh words for the industry, saying, "Gambling
is a tax on ignorance." He said it's revolting that the government takes
advantage of its citizens' weaknesses rather than protecting them.
Will the subprime market meltdown affect
the general economy? Buffett said his guess would be if unemployment
rates and interest rates don't go up dramatically then it will be
a big problem for those involved. He referred to subprime loans
as dumb borrowing and dumb lending, since people who can only pay
below-average payments will not be able to pay huge payments down
the road. He added that he doesn't think the meltdown will result
in any huge crisis in the economy. Real estate will take a couple
of years to recover.
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