2016: How do negative interest rates affect Buffett's valuations?
AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m John Gorry from Iowa City, Iowa.
When interest rates go from zero to negative in a country, how does that change the way that you value a company or a stock?
Do you choose a high valuation because the discount rate is low, or on the other hand, do you choose a low valuation because the cash flow is likely to be poor?
WARREN BUFFETT: Well, going from â which we haven’t done in this country, yet â but going from zero to minus-a-half is really no different than going from 4 to 3 and a half.
It has a different feel to it, obviously, if you have to pay a half a point to somebody. But if you have your yield â or your base rate â reduced by a half a point, it’s of some significance, but it isn’t dramatic.
What’s dramatic is interest rates being where they are, generally. I mean, whether they’re zero, plus a quarter, minus a quarter, plus a half, minus a half, we are dealing with a situation of, essentially, very close to zero interest rates, and we have been for a long time and longer than I would’ve anticipated.
The nature of it is that you’ll pay more for a business when interest rates are zero than if they were, like, 15 percent when [former Federal Reserve Chairman Paul] Volcker was around, and you can take that up and down the line.
I mean, we don’t get too exact about it, because it isn’t that exact a science, but very cheap money makes me pay a little more for businesses than when money was at what we previously thought was normal rates. And very tight money would cause me to pay somewhat less.
I mean, you know, the â we had a rule for 2600 years that â Aesop lived around 600 BC, but he didn’t happen to know it was BC, but, you know, you can’t know everything â and it was that a bird in a hand is worth two in the bush. But a bird in the hand now is worth about nine-tenths of a bird in the bush in Europe, you know, because it depends on how far out the bush, but it keeps getting a little less as you go on. So these are very unusual times that way.
And if you ask me whether I paid a little more for Precision Castparts because interest rates were around zero, than if they’d been 6 percent, the answer is yes.
I try not to pay too much more, but it has an effect. And if interest rates continue at this rate for a long time, if people ever really start thinking something close to this is normal, that will have an enormous effect on asset values.
It already has some effect. Charlie?
CHARLIE MUNGER: Yeah, but I don’t think anybody really knows much about negative interest rates. We never had them before.
And we’ve never had periods of stasis like â except for the Great Depression â we didn’t have things like happened in Japan: great modern nation playing all the monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years.
And none of the great economists who have studied this stuff, and taught it to our children, understand it, either. So we just do the best we can.
WARREN BUFFETT: And they still don’t understand it.
CHARLIE MUNGER: No. Our advantage is that we know we don’t understand it.
WARREN BUFFETT: It’s interesting, though. I mean, we are â you know, it’s â it makes for an interesting movie.
And it does modestly affect what we pay for businesses. Whether â I don’t think anybody expected it to last this long, do you Charlie, personally?
CHARLIE MUNGER: I don’t think â if you’re not confused, you haven’t thought about it correctly.
WARREN BUFFETT: Yeah. I thought about it correctly, then. (Laughs)