2005: What is the stock market's prospective 10-year return?

AUDIENCE MEMBER: My name is Al Henderson (PH) from Minnesota. I’d like to thank you both of you for being yourselves and doing so much for all of us and to help enrich ourselves and everyone else.

My question I have is — actually, you already referred to it — that you devote very little time to looking at the total market and look for individual opportunities most.

But I was wondering, in the past you made some excellent presentation on points to consider in projecting reasonable 10-year returns for the stock market and had to devise reduced expectations.

Where do we stand now on your stock market and economic measurements and expected 10-year returns?

WARREN BUFFETT: Yeah. Every now and then — I mean, and I agree — very infrequently, you probably can say something intelligent about markets as a whole.

I mean, that you do see circumstances that are extreme enough that you can make a statement that is likely to look reasonably intelligent five or 10 years later.

And I’ve seen a few of those times in my lifetime. I mean, I — and I’ve spoken out a couple of times. And I did in ’69 and ’74 and a few times. Most of the time, you know, you’re in some in between zone.

Obviously, you get more for your money in equities now than you got, say, in the summer of 1999, which is when I delivered a talk out of Sun Valley that later got turned into an article for Fortune.

But that was an — I spoke out then because it was extreme. I mean, I knew in a general way that I was going to be right, particularly in certain aspects of the market, but I didn’t know when, and then I didn’t know how right or anything of the sort. And you could’ve done the same thing in the other direction back in the mid-’70s.

I think that if you had to make a choice between owning long-term bonds, which are now yielding — the Treasury — only a little over 4 1/2 percent, or owning equities for the next 20 years, and you couldn’t make — change that decision, I would certainly prefer equities.

But I think people that have expectations that they can earn more than 6 or 7 percent in equities, and certainly when they start expecting double digits, I think the degree to what they have expectations, they can do that or that they can find somebody else to do it for them, I think they’re making a big mistake.

But 6 or 7 percent is not the end of the world at all. In fact, it — and it gets treated better tax-wise right now than it has almost any — well, really anytime in my lifetime.

So — I don’t think we’re in bubble-type, at all, valuations in equities. And I don’t think we’re anywhere close to — remotely close to bargain valuations. And I don’t think it’s an extreme enough period that you can speak out in some very definitive way about the outlook.

But if you told me I had to go away for 20 years and choose between what’s obtainable in an index fund of equities or be committed to long-term bonds, I would rather take equities.

But I think you will get a chance to do something that is more screamingly intelligent in not too many years — and maybe a lot shorter — than the alternatives that you’re offered now.

Charlie?

CHARLIE MUNGER: Well, I can’t improve on that at all.