Berkshire Hathaway 2006 Annual Meeting Audience Question # 9

Warren and Charlie shares their thoughts on whether there is a commodity bubble

Warren Buffett:

Let’s go to number 9.

Audience Member:

Hello. My name is Johann Freudenberg from Hanover, Germany.

Do you think we are in a commodity bubble? Thank you.

Warren Buffett:

Well, certainly… not in agriculture commodities, they haven’t done anything, if you’re talking about wheat or corn or soybeans or something.

But if you get into the metals, oil, there’s been a terrific move. The most extreme, probably, has been copper, I would say.

Oil, if you go back a few years to when it was $10 a barrel… it’s been more extreme than copper… but you were undoubtedly… it’s like most trends. At the beginning, it’s driven by fundamentals, and at some point, speculation takes over.

The very fact that… the fundamentals cause something that people looked at for years without getting excited about.

Fundamentals change the picture in some way.

Copper does get a little short, you know, or people get a little worried about currency and, maybe, gold goes up or whatever it may be.

But, you know, it’s that old story of what the wise man does in the beginning, the fool does in the end.

And with any asset class that has a big move, that’s based initially on fundamentals, is going to attract speculative participation at some point, and that speculative participation can become dominant as time goes by.

And, you know, famous case always being tulip bulbs. I mean, tulips may have been more attractive than dandelions or something, so people paid a little more money for them.

But once a price history develops that causes people to start looking at an asset that they never looked at before and to get envious of the fact that their neighbor made a lot of money without any apparent effort because he saw this early and so on, that takes over.

And my guess is that we’re seeing some of that in the commodity area. And, of course, I think we’ve seen some of it in the housing area, too.

How far it goes, you never know. I mean, it just… some things go on to just unbelievable heights, and then, you know, silver went back and that was manipulation, to some extent, but it got up to $50 an ounce very briefly back in the early ’80s.

But the eyes of the world that never looked at silver when it was $1.60 or… or $1.30 back in the ’60s, you know, everybody in the world was looking at it. And some were shorting and some were buying, but it becomes a speculative football.

And my guess is that an awful lot of the activity in something like copper now is speculative on both sides of the market.

If… you know, if it goes to $5 a pound, who knows? But it… you are looking at a market that is responding more to speculative forces now than to fundamental forces, in my view.

Charlie?

Charlie Munger:

Well, I think we’ve demonstrated how little we know about commodity prices by our very skillful operations in silver.

Warren Buffett:

I think you can change that from “our” to… it’s mine, actually.

I bought it very early. I sold it very early. Other than that, everything I did was perfect.

We managed to minimize things there with great efficiency, or I managed to. Charlie didn’t have anything to do with that. I was the silver king there for a while.

We did make a few dollars on it. But we’re not good at the game of, when it gets into the speculative area, figuring out how far a speculative boom will go.

If the fundamentals are attractive, we think we’re getting a lot for our money, buying equities or whatever it may be, we’ll make some money.

We will… we may not make as much money… remotely as much money… as somebody who is, you know, plays out the last 30 days or 30 weeks of a real wild orgy.

I mean, these things, they tend to be the wildest toward the end.

But that gets back to the question, you know, of Cinderella at the ball. I mean, you know, you’re there. You’re having a wonderful time. The punch bowl is flowing and the dance partners are getting prettier all the time.

And you know at midnight, it’s going to turn to pumpkins and mice.

And, you know, you look around the room and you think, “Just one more dance, one more good-looking guy,” you know, “one more glass of champagne.”

And you think you’re going to get out of there at midnight, and, of course, everybody else thinks they’re going to get out of there at midnight, too. And in the end, it does turn to pumpkins and mice.

And in this game, as I’ve said… you know, Adam Smith said it many years ago… a fellow named Jerry Goodman wrote under the pseudonym of Adam Smith… says the problem with that particular dance for Cinderella is that there are no clocks on the wall.

You know, and in the markets… if you’re talking copper now, if you’re talking Internet stocks in 1999, if you’re talking uranium stocks in the 1950s… there are no clocks on the wall.

And the party does get to be more fun, you know, minute after minute, hour after hour, and then it does turn to pumpkins and mice.

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