2021: How do SPACs affect Berkshire's ability to make acquisitions?
Becky Quick: This question comes from Sam Butler, who says he’s been a shareholder for many years and asks, what impact does the rise of so many new SPACs have on Berkshire’s ability to find and close new acquisitions?
Warren Buffett: Well, it’s a killer. These SPACs generally have to spend their money in two years as I understand it. So they have to buy a business in two years. If you put a gun to my head and said, you got to buy a big business in two years and I’d buy one, but it wouldn’t be much of one. It’s we’d look and look, and now there are, I don’t know how many, whether it’s hundreds and there’s always been the pressure from private equity funds. I mean, if you’re running money for somebody else and you’re getting paid a fee and you get the upside and you don’t have the downside, you’re going to buy something.
And I could tell you about a, I had a very famous, I had a call from a very famous figure many years ago that was involved in it, and wanted to learn about re-insurance. And I said, “Well, I don’t really think it’s a very good business.” And he said, “Yeah,” and he says, “If I don’t spend this money in six months, I’ve got to give it back to the investors.” So it’s a different equation that you have. If you’re working with other people’s money, where you get the upside and you have to give it back to him, if you don’t do something, and frankly, we’re not competitive with that. No, that won’t go on forever, but it’s where the money is now, and Wall Street goes where the money is and it does anything basically that works. And SPACs have been working for a while and you stick a famous name on it. You can, sell almost anything. And it’s an exaggerated version of what we’ve seen in, in kind of… Well, gambling done type market.
In fact, I did have a quote from Keynes that we might put up on the, let’s see if I’ve got… Yeah, this is probably one of the most famous quotes in history, because it really sums up the problem of the fact we’ve got the greatest markets the world could ever imagine. I mean, imagine being able to own parts of the biggest businesses in the world and putting billions of dollars in them and take it out two days later. I mean, compared to farms or apartment houses or office buildings, where it takes months to close a deal, the markets offer a chance to participate in earning assets on a basis that’s very, very low cost and instantaneous, huge, all kinds of good things, but it makes its real money if they can get the gamblers to come in because they provide more action and they’re willing to pay silly or fees and all kinds of things.
So you have this incredible, a huge asset to humanity, but it really makes its money when people are doing stupid things. I mean, that’s where the money really is. And Keynes wrote this in 1936, it says 1939 in the slide. But he wrote in 1936 in the general theory, that “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital of element of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.”
Well, the stock market, we’ve had a lot of people in the casino in the last year. You have millions and billions of people who’ve set up accounts where they day trade, where they’re selling… Put some calls, where they, I would say that you had the greatest increase in the number of gamblers essentially. And there’s nothing wrong with gambling and they got better odds than they’ve got if they play the state lottery, but they have cash in their pocket. They’ve had action. And they actually don’t have a lot of good results. And if they just bought stocks, they do fine and held them.
But the gambling impulse is very strong in people worldwide, and occasionally it gets an enormous shove and conditions lead this place where more people are entering the casino than are leaving every day, and that creates its own reality for a while. And nobody tells you when the clock is going to strike 12:00, and it all turns to pumpkins and mice. But when the competition is playing with other people’s money, or if they’re playing foolishly with their own money, but the big stuff is done with other people’s money, they’re going to beat us. I mean, we’re not… that’s a different game and they’ve got a lot of money, so we’re not going to have much luck on acquisitions while this sort of a period continues. But it’s happened before. This is about as extreme as we’ve seen it. Isn’t it, Charlie?
Charlie Munger: Yes, of course, I call it fee driven buying. In other words, it’s not buying because it’s a good investment. They’re buying it because the advisor gets a fee, and of course the more that you get, the sillier your civilization is getting, and to some extent, it’s a moral failing too, because the easy money made by things like SPACs and returned derivatives and so on, and so on. You push that to excess, it causes horrible problems with the civilization and reflects no credit on the people who are doing it, and no credit on the regulators and voters that allow it. So I think we have a lot to be ashamed of current conditions.
Warren Buffett: But it’s where the money is.
Charlie Munger: Yeah, but we still… It’s shameful, what’s going on. Yeah. It’s not just stew, but it’s shameful.
Warren Buffett: It’s not, I don’t regard it as shameful on a lot of the people that gamble. I mean, gambling is a very human instinct and they’ve got money in their pocket and they know somebody else has made money who they don’t think is any smarter, and…
Charlie Munger: No, no, I don’t mind the poor fish that gamble. I don’t like the professionals that take the suckers.