Berkshire Hathaway 2017 Annual Meeting Audience Question # 15

People will always speculate in markets

Warren Buffett:

OK, station 5?

Audience Member:

Dear Honorable Mr. Buffett and Mr. Munger, I’m Tian Du Hua from China. My company (the sound in this part of the video is inaudible) Holdings is spreading value investing philosophy in Asia.

My business partner Ken Chi, Cho Quy Ying, and I are committed to awake 100 million Chinese people to return to rational way of investing.

The hardest thing in this world is to change people’s values or belief system. And we should like to awake investors to change from speculate in the market to investing in the market. It’s not changing the speculator’s values or belief system.

May I ask you, Mr. Buffett, can you kindly advise us what we should do to spread your value investing philosophy? Or is there any word of encouragement? Thank you.

Warren Buffett:

Yeah, the… when… in any system… Keynes wrote about this in 1936… I think it was, in “The General Theory,” or ’35. I think it’s Chapter 12. It’s… great chapter on investing (you can get a copy of the book here).

And he talked about investment and speculation and the propensity of people to speculate and the dangers of it.

And worded eloquently, there’s always the possibility of, I mean, there’s always some speculation, obviously, and there’s always some value investors and all that sort of thing in the market. But there’s…

When speculation gets rampant, and when you’re getting what I guess Charlie would call “social proof”… that it’s worked recently… people can get very excited about speculating in markets. And we will have it from time to time in this market.

There’s nothing more agonizing than to see your neighbor who you think has an IQ about 30 points below you getting richer than you are by buying stocks. And whether it’s internet stocks or whatever. And it… and people succumb to it. And they’ll succumb in this economy just as elsewhere.

There’s also a point which gets to your question. I would say that early on in the development of markets… there is probably a… there’s some tendency for them, I think, to be more speculative than markets that have been around for a couple hundred years because the… it has a… invest…

Markets have a casino characteristic that has a lot of appeal to people, particularly when they see, like I say, people getting rich around them. And those that haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation.

So I… you know, basically in this country, Ben Graham was, in the book I read in 1949 (“The Intelligent Investor” – you can a copy of the book here), was preaching investment. And that book continues to sell very well.

But if the market gets hot, new issues are doing well and people on leverage are doing well, a lot of people will be attracted to, not only speculation, but what I would call gambling. And I’m afraid that that will be true in the United States.

And I think that China, being a newer market, essentially, in which there’s widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country, too.


Charlie Munger:

Well, I certainly agree with that.

The Chinese will have more trouble. They’re very bright people. They have a lot of action and, sure they’re going to be more speculative.

And it’s a dumb idea. And to the extent you’re working on it, why, you’re on the side of the angels. But lots of luck.

Warren Buffett:

Well, it will offer the investor more opportunities actually… if they can keep their wits about them… if you have wild speculation. I mean, we…

Charlie just mentioned earlier, you know, that if we get into periods that are very tough, Berkshire certainly will do reasonably well because it won’t… we won’t be… we won’t get fearful.

And fear spreads like you cannot believe until you’ve seen a few examples of it.

At the start of September 2008, you had 35 million people with their money in money market funds with $3 1/2 trillion in them. And none of them were afraid that that dollar wasn’t going to be a dollar when they went to cash in their money market fund.

And three weeks later, they were all terrified, and 175 billion flowed out in three days. And so the way the public can react is really extreme in markets. And that actually offers opportunities for investors.

You’ll never… people like action and they like to gamble. And if they think there’s easy money to be made, a lot of them, you’ll get a rush to it. And for a while it will be self-fulfilling and create new converts until the day of reckoning comes. They’ll…

Just keep preaching investing, and if the market swings around a lot, you’ll keep adding a few people here and there to a group that recognizes that markets are there to be taken advantage of, rather than to instruct you as to what is going on. OK. Andrew?

Anything more on that, Charlie?

Charlie Munger:

We’ve done a lot of preaching, Warren, without much effect.

Warren Buffett:

Right. And that’s probably good, from our standpoint.

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