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The Oracle speaks

Beware casino investing

Investing newsroom
Ashley Gardyne, Senior Portfolio Manager — International Shares

Ashley Gardyne
Senior Portfolio Manager — International Shares | Email Ashley »

06 May, 2021

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Warren Buffett, 91, is as famous for his wise words on investing as he is for being chairman and CEO of Berkshire Hathaway. This year, we joined the company’s annual meeting to hear the Oracle of Omaha’s pronouncements on casino-style investing, big tech, and the US economy.

Buffett was, and is, an inspiration to many of our investment team. Both for his investment track record – 20% annualised return from 1965 to 2021 – and for his willingness to share his knowledge with investors of all ages.

Buffett, often called the ‘Oracle of Omaha’, traditionally doles out wisdom at Berkshire Hathaway’s annual meetings. These meetings are known as ‘Woodstock for investors’ and typically see thousands of the faithful descend on Omaha, Nebraska. This year, due to COVID, we joined a 4-hour livestream of the meeting instead of attending in person.

We don’t believe the Oracle has lost his touch

This year, many investors have questioned the value of Buffett’s advice. Berkshire has underperformed recently, in a market that’s been largely led by technology companies.

Some ask if Buffett has lost his touch. We believe much of the recent criticism is misguided, and levelled by investors who haven’t learnt the lessons of investing through multiple business cycles.

Buffett may have missed some big tech stocks. But we can still learn a lot from someone who started investing in 1942, has seen 36 share market corrections, and has one of the best investment track records of all time.

Casino-style investing means high risks for many novice investors

Fielding questions, Buffett and Charlie Munger, his 97-year-old vice chair, covered a range of topics. The conversation highlighted the risks of casino-style investing – from share-trading app Robinhood and special purpose acquisition vehicles (SPACs), to Bitcoin.

Buffett mentioned casino-style investing repeatedly. He said that digital-trading apps like Robinhood enable this behaviour. And Munger was particularly worried about the risks new investors are taking. Millennials who use Robinhood own 14% of all 7-day option contracts in the US – and these are particularly risky, highly leveraged investment instruments.

On the bright side, Buffett pointed out it’s positive that more investors – particularly younger investors – are investing in the stock market, but highlighted the risks many take.

We agree with the Oracle on SPACs and Bitcoin: avoid them

Munger had a swipe at Bitcoin, while Buffett warned of the risks of SPACs, which have been raising money from new investors hand over fist.

We agree with this concern about SPACs: they are likely to only enrich their promoters. The vast majority of SPACs that have listed and completed an acquisition have lost significant value in an otherwise strong equity market. The average fall for SPACs is 39%, with several crashing over 80%.

Supporters of Bitcoin point to the fact that, like gold, the supply of Bitcoin is finite and this creates scarcity and hence value. But the rise of meme coins, like Dogecoin (!), in recent months show that there is no scarcity of cryptocurrencies. They are simply a giant Ponzi scheme that has yet to unravel.

The US economy is running hot and inflation is rising

Berkshire has a bird’s eye view of the US economy. The company’s broad collection of businesses – from railways and electric utilities, through to home builders, aerospace suppliers, and furniture retailers – give it real-time insights into what is happening in the US.

Buffett commented on a rapid acceleration in the economy in recent months. He’s seen stock-outs in Berkshire’s furniture stores, shortages of production inputs (like lumber for its homebuilders) and rising input costs. So Berkshire companies are lifting prices to cover rising costs – and finding that consumers are flush and willing to pay.

This chimes with what we’ve heard from other companies we talk to – consumers have money and are happy to spend it – but contradicts the official US line on inflation. Commerce Secretary Janet Yellen, and Fed Governor Jerome Powell say they are yet to see material signs of inflation.

The inflation question is one we’re keeping top of mind.

Buffett likes big tech, even though it’s not Berkshire’s bag

While the rise of big tech-stocks look excessive to many, Buffett shied away from pouring scorn on tech. Buffett described Google – a stock he’s said he regrets not buying – Microsoft, and Facebook as some of the best businesses he has ever seen.

He praised their ability to grow rapidly with modest capital requirements, and suggested that they aren’t expensive in the current interest rate environment.

It makes me wonder why Berkshire doesn’t own stakes in these businesses. But the fact that Berkshire doesn’t own them shows how disciplined they are as investors. They stick to industries they understand, and prioritise safety over maximising short-term performance in a frothy market.

Buy what you know – even when the casino lights look tempting

After pondering the Buffett’s comments at the meeting, two points stand out for me. First, after over 70 years of investing, Buffett still believes the US share market can reward investors over the long term. He believes, as do we, that there are still great businesses out there to invest in.

Second, Buffett gives the investment advice he’s always given: invest in businesses you know well and have researched thoroughly. And hold to that strategy even when others appear to be making easy gains around you.

Don’t be tempted to go off piste, no matter how alluring the casino lights look.



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