Berkshire Hathaway 2003 Annual Meeting Audience Question # 25

How Berkshire is positioned in an environment with low interest rates

Warren Buffett:

In terms of how we’re positioned, you know, we have 16 billion of cash, not because we want 16 billion of cash, or because we expect interest rates to go up, or because we expect equities to go down.

We have 16 billion in cash because we don’t see anything that makes us want to part with that cash where we feel we’re getting enough for our money.

But we would spend… we spent a Monday morning on the right sort of business, or even if we could find equities that we liked, or if we could find… like last year we found some junk bonds we liked. We’re not finding them this year at all, because prices have changed dramatically.

So, we’re not really ever positioning ourselves. We’re simply trying to do the smartest thing we can every day when we come to the office. And if there’s nothing smart to do, cash is the default option.

Charlie?

Charlie Munger:

In terms of future opportunities, the issue is, is it at all likely that there’ll be an opportunity like 1973-4, or 1982, even, when equities generally are just mouthwatering?

I think there’s a very excellent chance that neither Warren or I will live to see either of those occasions again.

If so, Berkshire’s not going to have a lot of no-brainer opportunities. We’re going to have to grind ahead the way we’ve been doing it recently, which is not all bad.

Warren Buffett:

It’s not impossible, though, we’ll get some mouthwatering opportunities. I mean you just don’t know in markets. It’s unbelievable what markets do over time.

And since you brought up interest rates, you know, in Japan the 10-year bond is selling to yield 5/8ths of 1 percent. Five-eighths of 1 percent.

I don’t think there’s anybody in our annual meeting of 20 years ago, certainly including Charlie and myself, who would have dreamt that a 10-year bond of a country, you know, running a significant deficit would be selling at 5/8ths of 1 percent.

I mean would you say so, Charlie?

Charlie Munger:

Would I ever. But strange things happen.

Warren Buffett:

Strange things happen.

Charlie Munger:

But if that could happen in Japan, something much less horrible for the investing class could happen in the United States. It’s not unthinkable.

I mean we could be in for a considerable period when the average intelligent, diversified investor in common stocks, using fancy paid advisors, just doesn’t do very well.

Warren Buffett:

But you could argue that if what we warned against, and hope doesn’t happen, with derivatives should happen, it might create enormous opportunities for us in some arena. I mean, you know, but we… wouldn’t be good for society, but it might very well turn out to be good for us.

If you get chaotic markets… you had a somewhat disorganized market in junk bonds last year, because there were a lot of them created much faster than the funds available to absorb them were coming in.

Now, this year you have just the opposite situation. You have money pouring in to junk bond funds. Billion dollars a week, roughly, and that’s changed the whole price situation. The world hasn’t changed that much. It’s just that the chaos has left the market for those instruments.

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Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

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