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Grahamites
Grahamites
Articles (210) 

Summary Notes From the After-Party CNBC Interview – Part 2

Gurus' insights on various topics

May 16, 2017 | About:

Buffett on Jeff Bezos

Warren Buffett (TradesPortfolio) never thought he could pull off what he did. He has done it in two industries almost simultaneously that really do not have that much connection. He has never seen any person develop two really important industries at the same time and really be the operational guy in both. He has done a good job with the Washington Post on the side. You take cloud services. He thought he would have two years of runway. He got seven years. You do not want to give Bezos a seven-year head start. At the same time he is shaking up the whole retail world, he is also shaking up the IT world.

Buffett on Amazon’s valuation

It is a big valuation. It is very hard when you thought about something one-tenth the price to buy it. We are talking now about getting multiples from the hundreds of billions. Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is not buying any Amazon (NASDAQ:AMZN), but Bezos has powerful ideas with big potential that he has executed.

Buffett on the most important item over time in valuation

The most important item over time in valuation is interest rates. If interest rates are destined to be at very low levels, not necessarily as low as they are now but very low compared to 100-year averages or 50-year averages, it makes any stream of earnings from investments worth more money.

You see it in real estate. Real estate yields adapt quite quickly and fairly directly with interest rates and appropriately. Stocks do not do it as much, but it is the same principle. Any investment is worth all the cash you are going to get out between now and Judgment Day discounted back. The discounting back is affected by whether you choose interest rates like those of Japan or interest rates like those we had in 1982 before Paul Volker took a sledgehammer to the economy. So when we had 15% short-term rates in 1982, it was silly to pay 20 times earnings for stocks unless you felt the world was going to change in a very material way. It is a huge bargain to buy stocks now if you knew these interest rates would stay at this level.

You can buy 30-year bonds. In Europe, they have been selling 50-year bonds. People are making a judgment every day and the yardstick is there. It is just a question of whether you believe the yardstick or not. The stock market is dirt cheap now if these interest rates were guaranteed for 10 or 15 or 20 years. That is the big thing investors have to think about.

Buffett does not think it is unthinkable they stay low for a very long time. By low, he meant 100 basis points higher than where they are now.

Munger on problems with U.S. health care system

Charlie Munger (TradesPortfolio) thinks the whole health care system is cockamamie. It is almost ridiculous in its complexity and its steadily increasing costs. It gives U.S. companies a big disadvantage in competing with other manufacturers (from other countries) because other countries have single-payer medicine and the U.S. is paying it out of the company. On the bright side, the U.S has the best medicine at the top and invented 60% of the world's best drugs. But if you look at it up close, the amount of waste from overtreatment of the dying is just disgusting. There is a lot wrong with the system.

Munger on how to fix the health care problem

Munger would go with Medicare for all and police it hard to keep out fraud, which is a universal health care system with more anti-fraud. We let the caregiver, the hospital and the doctor decide what should be done when they are getting paid for it and naturally they decide a lot of things should be done. Atul Gawande was the one that blew the whistle on McAllen, Texas. The doctors up there were just totally abusing Medicare. They just cross referred everybody for a lot of unnecessary stuff. And so they were all getting paid very heavily and that one little place was spending twice as much as ordinary places. When Gawande blew the whistle on them, they stopped doing it.

Kaiser Permanente is doing a great job by providing better quality health care at lower costs. They do not overtreat the dying and have very good internists and pediatricians that they hire right out of medical school. Kaiser pays the doctors a salary. The doctors do not get rich in Kaiser, but they have a life.

The U.S. could have an alternative system that people could use. A lot of our best doctors have opted out of Medicare. They just go to concierge medicine. They just leave the system. We have various ways for people who want to pay more and have somewhat better care. We want that as a safety valve. That is what Europe has. You can opt out and buy your own. You can go to some other country and get your medical care or you can take the state. But nobody in any of these advanced countries, including Canada, has the least interest of giving up medicine for all.

Gates on innovation in U.S. health care system

Bill Gates (TradesPortfolio) said it is absolutely true the companies here in terms of inventing new procedures, drugs, vaccines, have done a great job. Those are sold globally. You could say there is a small factor that, because we go first and because the way the pricing system works, a tiny bit of our medical costs do accrue to the world. It is an industry in which the U.S. is strong, and the number of jobs in that area have actually shifted into the U.S. instead of out.

Munger on the current environment in venture capital

There are times in finance when people just throw money away as though it were confetti. I think there is a lot of idiotic deal-making in venture capital now. And there is a lot of idiots out there. If the U.S. had some big recession, a lot of this labored finance would present a lot of agony. The future is just not guaranteed to be all rosy. People have been utterly surprised in things they deeply believed or fixed in that were not fixed at all. Who would have guessed we could print all this money and then not have any inflation? One thing you do know is there will be good stretches and bad stretches in the future.

Munger on the worst trades he ever made

Munger levered a bunch of convertible bonds when he was struggling for rationale. Every smart guy is tempted by leverage, and some of them are broken by it. It is somewhat capricious in terms of which ones get broken. Munger came close. He made a tech company investment. The company nearly went broke and Munger hovered on the edge of a precipice for about three or four years. It was agony and it was a lot of money to Munger at the time. He scrambled out of it with a pretty good profit, but it was not the world's smartest investment. It took a lot of intelligent scrambling to rectify the situation.

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fung9815
Fung9815 - 1 week ago    Report SPAM

My view on what Warren didn't tell us

Based on his tone, I'd like to guess that he thinks inflation will stay low for a long period to come, hence interest rates will stay low too in medium-to-long term horizon.

Nominal GDP growth (hence corporate revenue/earnings growth) equals to productivity growth (real GDP growth) plus pricing growth (inflation). Obviously productivity growth have been picking up speed thanks to technological advancement, but not pricing. Why?

Improvement in productivity has been shown by the much larger duplications of productivity via intangible assets (i.e. internet/software), which makes whatsoever producers able to produce goods/services in a muuuuch more cost efficient manner. Google, Facebook and Amazon, like Warren said, doesn't need much equity capital reinvestment to grow, since internet/software can duplicate services out from thin air. If anything, Amazon has been doing favor for humanity by lowering the prices of almost everything you can find. Even in the offline world, robots are also making leaps for manufacturing productivity. We are in a world now that is so competitively efficient that it is almost impossible for businesses to raise price as they like, like in the past. If anything, they actually need to lower their prices, since costs are now lower.

The great pricing efficiency will cap the inflation for a considerable amount of time (at least in the developed countries). Hence we should expect interest rates to be below historical average for some time too.

And therefore, we may see (actually we have already been seeing) a new normal in equity valuation based on Warren's interest-rate anology. 20 times P/E is not a scary thing anymore.

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