Warren Buffett’s straight talk makes sense

Ninety-two-year-old Warren Buffett, who has remained a clever investor who remained afloat during the stormy days of market turbulence, has always been a reassuring figure in the world of capitalism. So when he spoke out about the problems in the American banking sector at his Berkshire Hathaway’s shareholders’ meeting in his native Omaha, it brought a whiff of clarity.

Buffett calls the shareholders’ meeting of his company the “Woodstock of Capitalists”. He felt that the messaging about the troubles in the banking as in the case of the Silicon Valley Bank was one of spreading fear, which is not the right thing. He said that it was right that the banking regulators Silicon Valley Bank’s depositors were saved. He criticised the reckless offers made by the First Bank against mortgages which are unrealistic.

Charles Munger, 99, vice-chairman of Berkshire Hathaway, said that if bankers set out to become rich then it is not a good thing. Buffett recalled that during the First World War era, his father lost a job because of the run on the banks. He said that it was good that the Federal Depositors Insurance Corporation (FDIC) came into existence as an assurance to the bank depositors in America. Berkshire Hathaway owns $328 billion in stocks, half of them – $151 billion – in Apple. Buffett defended the investment in Apple saying that people are more likely to sell their $35,000 second-hand cars rather than their $1500 iPhones.

Buffett was quite clear that shareholders and executives of banks should be held responsible for the wrong decisions they make and endanger the depositors’ money. He said, “A lighted match can be turned into a conflagration or can be blown out. You have to have punishment for people who do the wrong thing.”

Reiterating his happiness of being part of the American free market economy, Buffett felt that “we have to refine, in a certain way, our democracy as we go along. But if I still had a choice, I would want to be born in the United States. It’s a better world than we have ever had.” He had in mind the tussle between President Joe Biden and the Republican-majority Congress led by Speaker Kevin McCarthy over the issue of raising the government’s debt ceiling. Munger, the man who spearheaded investments in China’s electric car manufacturer, BYD Co., said there should be less tensions between the United States and China, while Buffett dropped a quiet bombshell when he said he would prefer to invest in Japan rather than in Taiwan.

Buffett and Munger style themselves as old-school investors, and they assess the risks involved in their assessments by the old ground rules of profitability. They refuse to speculate and they are not looking for windfalls. Munger said that he was old-fashioned and outmoded, but he would not want banks to be in the investment business.

Buffett felt that in place of 150 and more executives who manage a modern investment bank, he or Munger would have handled it alone. He was indirectly criticising the elaborate corporate structure of the banks, where highly-paid investment bankers are all looking for new ways of increasing the return on capitals and in their desire to do so are doubling the risks of their hedge funds. Buffett’s advice is that there is need to get back to the old way of investing cautiously and not expect huge, unrealistic returns as had happened in the case of the recent bank fiascoes.

There is no place for greed. It might seem a strange, sage advice from the gurus of investment, Buffett and Munger, but it seems to be the most relevant prescription as the American economy struggles to get back on its feet.