AUDIENCE MEMBER 00:00
Hi. I’m Stanley Ku from Hong Kong. My question is about a proliferation of short-term mindset to investing.
WARREN BUFFETT 00:10
Well, I think you put your finger on it. And, you know, we do think it’s unhealthy.
Obviously, if you take — and no way of precisely measuring this, but I’m quite certain I’m right — if you take the degree to which, say, either bonds or stocks, the percentage of them that are held by people who could change their minds tomorrow morning based on a given stimulus, whether it be something the Fed does or whether it be some kind of an accident in financial markets, the percentage is far higher.
There is an electronic herd of people around the world managing huge amounts of money who think that a decision on everything in their portfolio should be made, basically, daily or hourly or by the minute.
And that has increased turnover on the New York Stock Exchange — and I don’t know the exact figures — but I think it was down around the 15 or 20 percent range 40 years ago and it’s increased it to a hundred percent, I believe, plus, now.
So — and certainly in the bond market, the turnover of bonds has increased dramatically. People used to buy bonds to own them and they’d buy bonds to trade them.
And there’s nothing evil about that, but it just means that the participants are playing a different game, and that different game can have different consequences than in a buy-and-hold environment.
And I do think it means that if you’re trying to beat the other fellow on a day-to-day basis, you’re watching news events very carefully or watching the other fellow very carefully.
If you think he’s about to hit that key, you know, you’re going to try to hit the key faster, if that’s the game you’re playing and if you’re getting measured on results weekly.
So I think that you describe the conditions that will lead to a result that we’ve been talking about expecting at some point.
It’s not new to markets, though. I mean, markets will do crazy things over time. Every time — when Charlie and I were at Salomon, they’d always talk to us about five sigma events or six sigma events, and that’s fine if you’re talking about flipping coins, but it doesn’t mean anything when you get human behavior involved.
And people do things that — and intelligent people do things — very intelligent, educated people do things — that are totally irrational, and they do them en masse.
And you saw it in 1998. You saw it in 2002. And you’ll see it again. And you’ll see it — it’s more likely to happen when you have people trying to beat currency, bond, stock markets, day by day.
It’s — I think it’s a fool’s game. But — you know, it may be what’s required to attract money.
When I set up my partnership, I told the partners, you know, you’ll hear from me once a year.
And I even thought — in 1962 I put the partnerships together and in May of 1962 the market got terrible — and I actually thought of sending all my partners a letter, and then sending it down to Brazil to have it reshipped back up, just to sort of test them out, but — how they felt about things.
But, you know, I had a few with bad hearts. I decided it wasn’t worthwhile.
CHARLIE MUNGER 03:37
Yeah. When people talk about sigmas, in terms of disaster potentialities in markets, they’re all crazy.
They got the idea that bad results in markets would be predicted by Gaussian distributions. And the way they decided on that outcome was it made everything so easy to compute.
They don’t follow Gaussian distributions. You have to believe in the Tooth Fairy to believe that.
And the disasters are bigger and more irritating than [German mathematician Carl Friedrich] Gauss would have predicted.
WARREN BUFFETT 04:21
It was easier to teach as well.
CHARLIE MUNGER 04:23
It’s easier to teach, too.
WARREN BUFFETT 04:24
CHARLIE MUNGER 04:25
I once asked a distinguished medical school professor why he was still doing an obsolete procedure, and he said, “It’s so wonderful to teach.” (Laughter)
WARREN BUFFETT 04:38
There’s more of that in finance departments than you might think.
It’s very discouraging to learn advanced mathematics and, you know, how to do things that none but the priesthood can do in your field, and then find out it doesn’t have any meaning, you know.
And what you do when confronted with that knowledge, after you’ve invested these years to get your Ph.D., you know, and you’ve maybe written a textbook and a paper or two, having a revelation that that stuff has no utility at all, and really has counter-utility, I’m not sure, you know, too many people can handle it well. And I think they just generally keep on teaching.
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There's nothing evil about short-term trading but it just a different game with different consequences in a crazy market. However, it is certain that having a short-term mindset in investing is very unhealthy.