2000: Could the relationship with price and intrinsic value break down?

AUDIENCE MEMBER: Hello, gentleman. My name’s Dan Sheehan. I’m from Toronto, Canada.

First of all, I’d like to thank you for this weekend. It’s become more and more important to me as it’s become more and more difficult to find a rational discussion about the stock market. And this weekend really is a breath of fresh air for most of us, I think.

One of the places I refer to a lot is Benjamin Graham. And what worries me now is what he referred to — is a period in 1929, in the early ’30s — as a lab experiment that — where normal intrinsic values and margins of safety broke down, or seemed to, anyway.

And I wonder how much you think that might happen now or in the next few years, and how much you worry about that with the investments you’re making.

WARREN BUFFETT: Well, we generally believe you can just see anything in markets. I mean, just extraordinary what happens in markets over time. It gets sorted out, you know, eventually.

But, I mean, we have seen companies sell for tens of billion dollars that are worthless. And at times, we have seen things sell for 20 percent — a number of things, not hard to find, perfectly decent running them — sell for literally 20 percent or 25 percent of what they were worth.

So we have seen and will continue to see everything. It’s just the nature of markets. They produce wild, wild things over time.

And the trick is, occasionally, to take advantage of one of those wild things and not to get carried away when other wild things happen.

Because the wild things create their own truth for a while and you have to — you know, you — that’s the reason they’re happening, and people are getting pleasant experiences and all that. You’ll see everything if you’re around markets for a reasonable period of time.

We don’t see any great cases of dramatic undervaluation by this market. So it isn’t like we’re seeing — because there’s this — perhaps this speculative mania in a particular area of the market, we do not see that creating incredible undervaluation other places.

What’s happening there may lead to undervaluation, you know, a few years from now. Or it may not, I don’t know that, but we’re —

It isn’t like you can find things that are worth double or thereabouts what you’re paying because, frankly, there’s so much money sloshing around that if you found such a thing, it would be very likely corrected by some buyout types.

I mean, we would love to find businesses that are selling for half of what they’re intrinsically worth. We don’t find that. We do find a lot of cases where we think the evaluations on the high side are just — are unbelievable.

We have been in periods in the past where we felt almost everything was being given away, too. So you’ll get those extremes. Most of the time the market’s in a position where there’s a little of both, but every now and then, it gets into a position where there’s a lot of one or the other.

And we would — you know, we would love it if we could find a lot of reasonable-sized companies that were selling at what we thought were half of the intrinsic value. We’re not finding them.

Charlie?

CHARLIE MUNGER: Well, I do think that the present time is a very unusual period. It’s hard to think of a time when residential real estate, and common stocks, and so on, rose so rapidly in price and there was so much easy money floating around. I mean, this is a very unusual period.

WARREN BUFFETT: What’s fascinating — and I’m sure you’ve thought of it — is that you can now have a business — we saw a few of them, you know, earlier this year we’ll say — that might’ve been selling for $10 billion where the business itself could not have borrowed, probably, a hundred million dollars in debt, with an equity evaluation of 10 billion.

But the business itself would not — as a private business — would not have been able to borrow a hundred million. But the owners of that business, because it’s public, can borrow many billions of dollars on their little pieces of paper, because they have this market valuation.

If it’s a private business, the company itself couldn’t borrow one-twentieth or so of what individuals could borrow.

That’s happened, to a degree, before. But this has probably been as extreme as anything that’s happened, probably, including the ’20s. That doesn’t mean there’s a parallel to it, but it’s been pretty extreme.

Charlie?

CHARLIE MUNGER: I think it probably is the most extreme that has happened in modern capitalism. In my lifetime, I would say the ’30s were the — it created the worst recession in the English-speaking world in 600 years.

And it was very extreme. You could buy a “all-you-can-eat” in Omaha through the ’30s for a quarter from Henderson’s Cafeteria.

And now we’re seeing the other face of what capitalism can do. And this is almost as extreme as the ’30s were, but in a different direction.

It’s zero unemployment, rampant speculation, et cetera, et cetera. It’s an amazing period.

WARREN BUFFETT: That does not make it easy to predict, however, the outcome.

It says to us, though, certain things we want to stay away from. I mean, basically that’s — it’s precautionary to us. It does not spell opportunity.

Although, there’s no question that the — in the last year, the ability to monetize shareholder ignorance has never been exceeded, I think. Wouldn’t you say so, Charlie? (Laughter)