2000: How will demographics affect the stock market?

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. My name is Erras (PH). I’m from Winnipeg, Manitoba, Canada. And my first time in Nebraska, in Omaha, first time hearing you guys live.

And there’s a big ice cream man behind you.

WARREN BUFFETT: Hmm. There we go!

FEMALE VOICE: Here you go.

CHARLIE MUNGER: Oh, thank you.

WARREN BUFFETT: And you think there are no management perks at Berkshire.

AUDIENCE MEMBER: Oh, boy. (Laughter) All right, let’s get down to business.

WARREN BUFFETT: OK.

AUDIENCE MEMBER: My question is in reference to your article in Fortune magazine last November, where you talked about corporate earnings and what the market — are you guys listening? Or…

WARREN BUFFETT: I’m listening. (Laughter)

We can chew gum and listen at the same time.

AUDIENCE MEMBER: All right, all right, all right. As I was saying —

WARREN BUFFETT: But if we had —

AUDIENCE MEMBER: — the point in your article in Fortune about corporate earnings and what the market is paying for them, painting a pretty gloomy picture for equities and market levels going forward.

Now, as you may know, there exists a very strong trend in demographics. We see, in Canada and the United States, the aging of the population and, more importantly, the bulk of this population reaching their peak savings years, all at the same time.

WARREN BUFFETT: You’re getting a little rude. But go ahead. (Laughter)

AUDIENCE MEMBER: I can’t believe this. Warren actually called me rude.

WARREN BUFFETT: I wanted to prove to you I was listening. Go ahead. (Laughter)

AUDIENCE MEMBER: Anyways, OK, so there’s a major retirement crisis as a majority of Canadians and Americans between the ages of, especially between 22 and 55, are worried that they won’t have enough money to fund their retirement or let alone, last.

So for this reason, I mean, this population is expected to invest in equities, as opposed to fixed-income instruments, to get the necessary long-term rates of return to fund their nest egg for retirement.

And therefore, many are calling for massive amounts of money to flow into the markets over the next five, 10, 15 years through stocks and mutual funds and, consequently, fueling market prices and market levels. Many predicting the biggest growth ever in the stock markets.

So what is your opinion on this potential trend, separately or in conjunction with what you said in that article in Fortune? Thanks very much.

WARREN BUFFETT: Good. To be, I’m not being rude here, but we don’t think it means a thing, frankly. (Laughter)

The savings rate, the private savings rate, you know, is not high now. It doesn’t need to be high.

What really determines how the people who are either aged or very young, because either way, the people who are in their nonproductive years depends, in aggregate, on aggregate production of goods and services, and then the division between those who are in their productive years and in their nonproductive years. And that’s what Social Security argument’s about and everything.

The biggest single thing working for people in their nonproductive years on both ends, young and old, is the fact that the pie keeps growing. And that makes it easier to attack the problems of the nonproductive.

And when I say, “nonproductive,” there’s obviously no — nothing derogatory about that term. It just relates to who’s in the employable age and who isn’t.

And our society is going to do extremely well in terms of being able to take care of the people in their nonproductive years.

If there — there is a shift, obviously, as people live longer. And of course, there should be a shift, perhaps, in defining — I think there should be — in defining what’s productive, because 65 was decided back in the ’30s. And I think that’s changed.

But the fact that the pie keeps growing is what makes it — it makes the problem easy. And — not easy — but it’ll be easier 30 or 40 years from now, in my view, you know, than it was 30 or 40 years ago.

Because there’ll be so much more in the way of goods and services produced per capita that the productive can take care of the nonproductive and the — or the aged — in a way that will be easier for them to sustain than it was in the past. When —

It’s low amounts of output that strains society. I mean, when you get very small amounts of output, or huge disparities in the division of that, that you put real strains on a society.

But a society whose output is growing 3 percent a year and whose population is growing 1 percent a year is going to have way less in the way of strains than existed 20, 30, 50, 100 years ago. The —

But, you know, we will need no big boom in savings or anything of the sort. The present savings rate will do — will just do fine for the world. In the United States, I mean, I’m not speaking to the — I shouldn’t speak to the whole world on that.

Charlie?

CHARLIE MUNGER: Well, generally, you can say that stocks are valued in two different ways.

One, they’re valued much the way wheat is valued, in terms of its perceived practical utility to the user of the wheat.

And there’s a second way that stocks are valued, which is the way Rembrandts are valued.

And to some extent, Rembrandts are valued high, because in the past, they’ve gone up in price.

And once you get a lot of Rembrandt element into the stock market, and you fuel the stock market with massive retirement system purchases, you can get stocks selling at very high prices by past historical standards. And that can go on for a long, long time.

That’s what makes life so interesting. It isn’t at all clear how it’s going to work out. It isn’t even clear what the level of interest rates is going to be.

And nobody in this room ever expects to see 3 percent interest rates continue for a long time again. But that could happen. That would have an enormous effect on the price of equities.

You live in a world where you can’t really predict these macroeconomic changes.

WARREN BUFFETT: No, you can argue that increases in savings will drive down the returns on capital. The more capital is around, that the lower the returns will be on capital.

But I don’t think you’ll — I don’t think it will help you make any decisions about businesses, you know, over your lifetime by — actually by thinking about matters like that. We’re a little biased on that. But you’ll find all kinds of guys that will tell you. I mean, that’s what books are written about. Because everybody likes predictions and books. So, you could all —

Go ahead.

CHARLIE MUNGER: In addressing this question, you can see that we have acted much as one of my old Harvard Law professors acted. He used to say, “Let me know what your problem is. And I’ll try and make it more difficult for you.” (Laughter)