2005: What is Berkshire's strategy for a bear market?

AUDIENCE MEMBER: I’m a physician from St. Louis. And I want to thank you and everyone here, because I’m one of these doctors that really doesn’t know anything about money or finance. The money comes in, but I don’t know what to do with it.

I’m not able to really evaluate the financial strength of a company, but I can evaluate the ethical strength of a company. And that’s why I feel real comfortable — I think most of us here — having our savings in Berkshire Hathaway. And the —

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: This question has probably been asked in different ways already, but several years ago, a fellow I know who was — had been manager of Magellan Fund — warned that we were going to have a terrible decade or so in the stock market because of all the things people have brought up so far.

The increasing interest rates, and runaway spending, and decreasing dollar, and stagflation may be right around the corner, Social Security problems.

And even what Charlie Munger referred to, is that most of our best and brightest graduates, I find, are going into money management rather than — they’re not becoming doctors or molecular biologists or Ph.D.s in chemical engineering.

And so, in view of the fact that a year or two ago, people — there was still an ebullience of emotion about the stock market going up and making everyone rich just by having their money in the stock market — it seems like that ebulliences dropped, and I’m hearing, in anticipation of a bear market.

And you wrote, I think several years ago, that it’s hard to make money in a bull market. And the real opportunities come in a bear market.

So, I’m wondering if you would give us a clue as to what your strategies are going to be, if it’s really true that the market gets dismal over the next few years.

WARREN BUFFETT: Well, if the market gets cheaper, we will have many more opportunities to do intelligent things with money. Now whether we will blow on the money in the meantime or something is another question.

But, you know, we are going to be buying things — one thing or another — operating businesses, stocks, high-yield bonds, whatever — we’re going to be buying things for as long as I live, just like I’m going to be buying groceries —

CHARLIE MUNGER: Longer than that, Warren.

WARREN BUFFETT: Yeah. (Laughter)

Yeah. Charlie’s just waiting to take over after I’m — (Laughter)

And I’m going to be buying groceries the rest of life. Now, would I rather have grocery prices go up or down if I’m going to be buying groceries tomorrow and next week and next month and next year? And the answer is obviously, if I’m a net buyer, I would — I will do better if prices are lower.

We have no — we’re not good at forecasting markets. I mean, we, in a general way, knew that we were getting enormous bargains in the mid-’70s. We knew that the market went crazy to some extent in the late ’90s.

But we don’t have much — we don’t spend any time — Charlie and I spend no time — thinking or talking about what the stock market is going to do, because we don’t know.

We do know, sometimes, that we’re getting very good value for our money when we buy some stocks or some bonds, as it may be. But we are not operating on the basis of any kind of macro forecast about stocks.

And there’s always a list of reasons — you gave a few — there’s always a list of reasons why the country will have problems tomorrow. But there’s always a list of opportunities which don’t get mentioned quite as often.

So, we don’t sit down and make a list of the bad things that are happening in the economy and the good things that are happening, and therefore expecting the stock market —

It might not — it doesn’t behave that way even if you could correctly forecast some of the bad things or good things.

Overall, I’m an enormous bull on the country. I mean, over time — I mean, this is the most remarkable success story in the history of the world, if you think about it. I mean, in 1790 we had less than four million people in this country.

We had — there were 290 million people in China. There were 100 million people in Europe. You know, and they all had the same intellect we had. They’re in the same general climate. They had lots of natural resources.

And 215 years later, those 3.9 million people, I think, actually, you know, have 30 percent or so of the world’s GDP. So, it does not make sense to bet against America.

That doesn’t mean all our policies are smart or anything, but I would not — I do not get pessimistic on the country. You know, I worry about the — I mean, the big worry is what can be done by either terrorists or governments that have access to nuclear, chemical, or biological weapons.

But, in terms of the basic economics of the country, your children are going to live better than you live. And your grandchildren are going to live better than your children live. And we do not focus on macro factors.

Charlie?

CHARLIE MUNGER: Well, I agree with you that the economics of the country are probably going to increase for a considerable period ahead. But I suspect that, in very important ways, we are at or near the apex of a great civilization. (Laughter)

WARREN BUFFETT: You heard it here first, folks. (Laughter)

If you leave the NCB — nuclear, chemical, biological — out of it, I do not feel that way. But, you’ll get to see which one of us is right 20 or 30 years from now.

It — I have seen more people pass up opportunities because they get focused on a single economic variable or a single problem that the country faces, and they forget about the good things.

I mean, if you can buy very good businesses at attractive prices, it’s crazy to say, “I think I’ll sit this out because it might get a little cheaper next year,” or something of the sort, and because the world’s going to go to hell.

We just — we’ve never operated that — we’ve never decided not to buy a business we liked because of a macro view. Have we?

CHARLIE MUNGER: Not yet.

WARREN BUFFETT: OK. (Laughter)

It’s hard to get him to really agree with you. (Laughter)

I’ve been working on it for years.