Berkshire Hathaway 2013 Annual Meeting Audience Question # 55

People who have stayed in cash, cash equivalents or short-term treasuries are hurt by the low interest rates

Warren Buffett:

OK. Station 7.

Audience Member:

Hi. I’m Brad Johnston from Minneapolis, Minnesota.

And my question is within the context of a very low interest rate environment that may be sustained for some time and the challenge that insurance companies are facing in that environment with respect to managing their capital, as well as managing their risk and uncertainty when they have future liabilities and potentially the need for liquidity.

And maybe you could transcend that down to the individual, as well, who is dealing with a low interest rate environment, trying to manage uncertainty and yet still get some cash return from investments.

I appreciate your concept of selling, you know, some of your shares periodically and being better off to do that rather than take dividends, but many people are dealing with the challenges of cash flow.

Warren Buffett:

Yeah.

Audience Member:

And then… and just one final tag-on. If you could at the end, could you explain what Federal Reserve Chairman Ben Bernanke believes he has as a tool in his toolbox called the “term credit facility”?

Warren Buffett:

No. The answer is I can’t. Can you, Charlie?

Charlie Munger:

No.

Warren Buffett:

The problem faced by people who have stayed in cash, or cash equivalents, or short-term Treasuries, or whatever, I mean, it is brutal.

The loss… if they live off their income, you know… the loss of purchasing power, it’s just staggering when you get into these low interest rates. They are huge victims of a low-interest policy and a dramatically low-interest policy, you know.

Basically, you know, I’ve written… I wrote back in 2008 to own equities. I mean, it was… equities were cheap.

And you were almost certain to get killed, you know, in terms of… for at least a while… we had a promise that the Fed was going to hold rates very low, so it was a great time to own equities.

And I feel sorry for people that have clung to fixed-dollar investments, particularly short-term ones, during a period like this, and I don’t know what I would do if I were in that position.

Imagine having, you know, some sum that seemed like a very large amount of money in the past but, you know, a quarter of a percent on a million dollars is $2,500 a year, and that is not what people anticipated when they were saving over the years.

So I… well, anybody I’ve advised, I’ve always felt that owning businesses certainly made sense… more sense… than fixed dollars, under most circumstances.

Not every time in my life, but probably 90 percent of the time in my life, it’s made more sense than owning fixed-dollar investments. And it’s certainly made dramatic sense a few years ago when equities were marked down to where they were, you know, terrific buys, and where you could see the prospect that fixed-dollar investments were going to pay very little for a considerable period of time.

And I didn’t anticipate that we would see the kind of rates for the extended period that we have already, and I don’t know how long it will go on.

But it’s a real dilemma for people. I get letters… I get a lot of letters… from people that say, you know, “I’ve got $300,000,” and they say, “What should I do?”

So it’s… the fallout from low interest rates has hit millions of people in a very harsh way. And you don’t read much about it and they don’t have much of a voice, but it’s been a good argument for owning productive assets rather than dollars during a period like this.

Charlie?

Charlie Munger:

Well, they had to hurt somebody, and the savers were convenient.

Warren Buffett:

What would you do about it?

Charlie Munger:

I would’ve done about what they did.

Warren Buffett:

Yeah, so would I.

Charlie Munger:

I would’ve felt bad about it, but I would have… that’s what I would have done.

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