2007: Would Buffett invest a portfolio in a mix of stocks and bonds?

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Frank Martin from Elkhart, Indiana. I’m a shareholder.

WARREN BUFFETT: Yeah. You’ve written a good book too, Frank. (Laughs)

AUDIENCE MEMBER: Thanks, Warren. I’ll do my best to be succinct with this question. As you know, my long suit is not brevity in the written word.

Recently, I sequentially read everything that you and Charlie have written, or that has been written about you, since 1999, including your help wanted ad in the annual report, which sought not a Ted Williams, but the consummate defensive player in your forcefully worded quotations in last Monday’s Wall Street Journal.

When contemplating the chronology, I sensed a gradual but unmistakable sea change in your perspective on the investment environment for marketable securities.

The intensification of your preoccupation with managing risk is conspicuous by its absence among the other biggest players at the margin — hedge funds, private equity, mutual funds — who are shamefully mute both about what are likely to be anemic prospective returns and the unconscionable risks assumed to achieve them, all the while charging a king’s ransom for such low value-added services.

When I give free rein to my intuition, the post-1999 Warren Buffett reminds me of the Warren Buffett of post-1969.

Back then, when Berkshire was a small fraction of its current size, you spoke of the difficulty in playing a game you did not understand, that there was little margin of safety in the equity markets in general.

You weren’t forecasting what in its own time became the bear market of ’73-’74, but you were surely intuitively aware of what [former Federal Reserve Chairman Alan] Greenspan years later has repeatedly warned: the inevitable day of reckoning that follows long periods of low equity risk premium.

Imagine yourself, if you are willing, cast overnight into a new role with a clean slate as head of the investment committee of a $10 billion pension fund.

Today, would your decisions reflect the same risk-averse mindset that dominated your behavior in the post-1969 period? And might you anticipate that following all of this might appear opportunities that were as mouthwatering as appeared in ’73-’74?

Please explain, and I hope Charlie will weigh in on the subject as well. Thank you.

WARREN BUFFETT: Yeah Frank, when I closed up to the partnership, if I’d had an endowment fund to run then, the prospective return — and actually, I wrote this in a letter to my partners that I’d be glad to send you a copy of — the prospective return — and I was looking at them as individuals on an after-tax basis — was about the same, I felt, from equities and from municipal bonds over the next decade, and it turned out to be more or less the case.

I would say that I do not regard that as being the same situation now. If I were managing a very large endowment fund, for one thing it would either be a hundred percent in stocks or a hundred percent in long bonds or a hundred percent in short-term bonds.

I mean, I don’t believe in layering things and saying I’m going to have 60 percent of this and 30 percent of that. Why do I have the 30 percent if I think the 60 percent makes more sense?

So — and if you told me I had to invest a fund for 20 years and I had a choice between buying the index, the 500, or a 20-year bond, you know, I would buy stocks.

You know, that doesn’t mean they won’t go down a lot. But if you — I would rather a have an equity investment — I wouldn’t rather have an equity investment where I paid a ton of money to somebody else that took my stock return down dramatically.

But simply buying an index fund for 20 years of equities or buying a 20-year bond, I would — it would not be a close decision with me.

I would buy the equities. I’d rather buy them cheaper, you know, but I’d rather buy the bond with a bigger yield, too. But in terms of what’s offered to me today, that’s the way I would come down.

Charlie?

CHARLIE MUNGER: Yeah. I don’t think that was the answer that was expected, but that’s the answer. (Laughter)

WARREN BUFFETT: It doesn’t have a thing to do with what we think stocks — we don’t think at all — but where stocks could be or bonds could be.

We don’t have the faintest idea where the S&P will be in three years, or where the long-term bond will be in three years, but we do know which we would rather own on a 20-year basis.

CHARLIE MUNGER: Warren, we’d also expect that the current scene will cause some real disruption, not too many years ahead.

WARREN BUFFETT: That’s true, but if you go back a hundred years, you could almost say that, you know, in almost any period, you will get disruptions from time to time, and it’s very nice if you have a lot of cash then and you have the guts to do something with it.

But predicting them or waiting around for them, that sort of thing, is not our game. And I mean, we bought $5 billion worth of equities in the first quarter, something like that.

And, you know, we don’t think they’re anything like — well, they aren’t — they’re not — it would be a joke to even compare them to 1974 or a whole bunch of other periods. But we decided we would rather have them than cash, or we would rather have them than sit around and hope that things get a lot cheaper.

We don’t spend a lot of time doing that. It — you can freeze yourself out indefinitely.

So any time we find something — what we think is intelligent to do, we just do it, and we hope we can do it big.