Collection: Warren Buffett - #322 'Leverage Is The Biggest Danger To Investors'



[Transcript]

AUDIENCE MEMBER 00:00

Thank you very much, Mr. Munger and Mr. Buffett.


My question regards — well, I’m Michael Stofski (PH) from New York.


My question regards financial institutions and the potential of collapses.


And how is Berkshire protected, and how can the individual investor protect themselves against potential bank failures, stock brokerage failures, and things like that?


WARREN BUFFETT 00:25

Well, I think as a depositor with large banks, or as somebody that leaves their securities with large brokerage firms, I really don’t think you to worry very much.


We have a “too big to fail” doctrine operating in this country, relative to what you might call the innocent parties in big financial institution failures. We don’t have it in respect to the equity holders, nor should we have it.


But I would not — I don’t worry about leaving my securities — my personal securities — or for that matter, Berkshire securities — with the large securities firms. I don’t worry about my bank accounts at big banks, so —


CHARLIE MUNGER 01:10

But you’re talking cash accounts?


WARREN BUFFETT 01:11

Yeah, cash accounts.


CHARLIE MUNGER 01:13

Yeah, not margin.


WARREN BUFFETT 01:14

Yeah. And the — but if you, in terms of owning the equities of companies like that, or in terms of the fallout, the big thing that will —


Really, the only way a smart person that’s reasonably disciplined in how they look at investments can get in trouble is through leverage. I mean, if somebody else can pull the plug on you during the worst moment of some kind of general financial disaster, you go broke. And Charlie and I both have friends that have — where that’s happened to them.


But absent leverage, and absent just kind of going crazy in terms of valuation on things, the world won’t hurt you over time in securities.


And, I mean, you won’t be subject to the financial cataclysms that — they don’t need to do you in. If you have any more money during periods like that, you buy.


Berkshire, I think, is in an extraordinarily strong position in respect to any kind of a financial cataclysm. I think we would be definitely the last man standing, and then some.


And while we don’t go around, you know, like undertakers looking for a plague or anything like that, you know, we would probably do very, very well in the end.


And that’s happened a couple of times, actually, in the past, where we’ve had cash, and we’ve had courage when the world was panicking, and it’s — we’ve done reasonably well during that period.


And we’ve never gotten hurt by what was happening in the world around us, at least in the last 30 or 40 years.


Charlie?


CHARLIE MUNGER 03:11

Well, I think that’s plainly right.


WARREN BUFFETT 03:15

Okay, well with him saying that after I've made a comment, I think we can happily disband. We'll see you next year and we'll see the international people at four o'clock. Thank you.


(Source: https://buffett.cnbc.com/2004-berkshire-hathaway-annual-meeting/)

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