2010: What’s a reasonable rate of return to expect from equities over the next decade?

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m (inaudible) from Fort Lauderdale, Florida. First of all I want to thank you for sharing your wisdom with us so generously.

Back in October of 2008, you highly recommended buying U.S. stocks and that was a brilliant idea, it worked very well.

And I just want to get your opinion how you think about the market going forward.

Are you still that optimistic, and what’s a reasonable rate of return to expect from equities in the next decade or so?

WARREN BUFFETT: Well, I write articles very infrequently, or get interviewed very infrequently, on the subject of the general level of the market itself. Probably only four or five times in 40 years have I really declared myself about — what I thought — about the general level of the stock market.

And it turned out I was pretty premature, actually, in October of 2008, as was pointed out to me by a number of people.

But I felt — and what I said in that article really was that it would be way better to own stocks over the long term than to follow a policy of buying either long-term bonds or holding cash. And I knew I could make that statement and I would be eventually — I thought odds were very high — I’d be proven right on that.

But I don’t like — I don’t know what the stock market’s going to do next week, or next month, or next year. I don’t have any idea.

People always think I do. I know I don’t have any idea, I don’t think about it, it doesn’t make any difference because Charlie and I — I can’t recall a discussion we’ve ever had on it, basically.

But I do think over the next 10 years or 20 years, I’d much rather own equities — including U.S. equities — I’d much rather own them than cash, or I’d much rather own them than a 10 or 20-year bond. But that’s partly because I’m very unenthusiastic about the alternatives.

I think equities are likely to give you some positive — modest positive — real return over time. But beyond that I really don’t know anything.

Charlie?

CHARLIE MUNGER: That’s a cheerful thought that equities are the best of a bad lot of available opportunities. (Laughter)

WARREN BUFFETT: You disagree with it?

CHARLIE MUNGER: No, I think you’re right. (Laughter)

I think people should get accustomed, on average, to doing less well in their investment portfolios, in real terms.

WARREN BUFFETT: Charlie and I don’t —

CHARLIE MUNGER: I think we’re in for a long period of where the ordinary result is not going to be very exciting.

WARREN BUFFETT: But we like owning businesses. And we’re in a position where we can own entire businesses, but we also like partial ownership of businesses.

And we want to own businesses where we really think they have some competitive advantage over time, and where we feel good about the management, and where we think the price is reasonably attractive.

I think you can find things like that now, but they aren’t dramatically attractive at all. They do beat, in my view, they do beat holding cash or five, 10, or 20-year bonds.