What Warren Said (Final)

This is the last in our series of Buffett's testimony at the GFC Inquiry. 

                                          +++++++++++++++++++++++++++++++++++++

Mr. Bondi: Throughout the nineties and the 2000s, members of Congress, members of the Administration were all encouraging homeownership.

Mr. Buffett: Sure.

Mr. Bondi: Both through statements, through plans and policies.

How much of that do you think contributed to the bubble?

Mr. Buffett: It all contributes.

But the truth is, I’ve told the people, you know, home is a good investment, particularly ‑‑ you know, it’s got values beyond what it will do in terms of possible appreciation over time.

It really is a way to go short the dollar, I mean, if you borrow a fair amount of money against ‑‑ and most people don’t have a good way of being short to dollar, and it’s a pretty sound policy to be short dollars as long as your carrying costs aren’t too high; and when interest rates get low, the carrying costs are not high.

So it is not an unintelligent thing to do. It’s only ‑‑ it’s only when it gets into this bubble aspect that it becomes unintelligent.

But I would recommend today, you know, if a couple can afford it and you’re not paying silly prices in terms of replacement value or anything like that, if you want to buy a home in Omaha, I would say, you know, if you find the neighborhood you want and your family’s going to live there ‑‑ you know, right now, I think mortgage rates are very attractive, I would say, “Buy it,” you know.

But I wouldn’t say, “Buy three more on speculation,” and I wouldn’t say, “Buy it if it’s going to take 50 percent of your income to service the mortgage.”

It’s a sound idea that went crazy.

Mr. Seefer: One of the areas in our statute is the role of monetary policy. And, of course, a lot of folks have commented on the low level of interest rates throughout the 2000’s.

Any view on that as a contributing cause?

Mr. Buffett: Well, it makes it obvious, it makes it easier. But, no, I don’t think that was what caused this.

You couldn’t have had it if you had 15 percent rates, obviously. But it all ‑‑ it all worked together you know. And finally, the fact that houses kept going up a lot. It just ‑‑ it put a model in people’s mind. You have 300 million Americans who have got an economic model in their mind, and you would say, you know, “Moody’s is dumb for having it and the S & P is dumb for having it” ‑‑ but it was pervasive.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Our Thoughts - Buffett highlights an important point here right at the start. The fact is there are many factors that cause asset bubbles not just one.  Often when something fails, we look for the all encompassing single factor - in the current case, Australia's property problems are because of immigration. The reality is the property problem is a natural occurrence from a combination of factors which we will discuss in an upcoming podcast special. 

 Buffett mentioned that some investment decisions or for example, buying a property makes sense because of fundamental reasons but also because there are emotional reasons - like the feeling of security - for purchasing a property. But he also states that when it gets into bubble territory it no longer makes sense. We often talk about this point - when you buy is critical because there can be a large and growing discrepancy between price and value. Just because something was cheap doesn't mean it is always cheap. Hence why we teach about cycles. 

He follows up with saying that buying where it takes a large portion of your income is silly. Many Australia are in this exact position and thanks to interest rate increases are coming under increasing financial pressure.

The strongest influence on your investment decisions if you don't study markets will be what others including your own family are doing. Groupthink is pervasive and as social animals, most investors will simply follow the crowd rather than spend the time necessary to understand how markets operate.

But like Buffett, if you do spend time understanding markets and managing your emotions, you will do better than 99% of investors over the long term.