2022: How was Buffett able to buy so many OXY shares so quickly?

WARREN BUFFETT: And what happened was that a few stocks got very interesting to us. And we also spent a lot of money.

What happened — the market — and this is really important to understand — in the last couple years, the stock market has probably — it’s always been a combination of a casino and a — and when I talk about Wall Street, I’m talking about the whole capital formation market — but the — and trading market, et cetera.

But the market has been extraordinary.

Sometimes it’s quite investment oriented. It’s not like it — it’s always what you’ve read about in the books and everything — what capital markets are supposed to do, and you study it in school and all that. And other times, it’s almost totally a casino, and it’s a gambling parlor.

And that existed to an extraordinary degree in the last couple of years — encouraged by Wall Street because the money is in turning over stocks. I mean, people say how wonderfully you’ve done if you bought Berkshire in, you know, 1965 or something and held it. But your broker would’ve starved to death.

Wall Street makes money on — one way or another — catching the crumbs that fall off a table of capitalism and an incredible economy that, you know, nobody could’ve ever dreamed of a couple hundred years ago.

But they don’t make money unless people do things (laughs) and if they get a piece of them.

And they make a lot more money when people are gambling than when they’re investing. It’s much better to have somebody that’s going to trade 20 times a day and get all excited about it, just like pulling the handle on a slot machine. You know, that’s who you — you know —

You may not say that you want that person. You’d like the other kind of person, too, maybe, but that’s where you make the money. (Laughs)

And the degree to which the market got dominated by that is shown on a slide some — I have it here somewhere. Yeah. Here’s — on [slide] Oxy-one — if you’ll put up the Oxy-one.

That shows how we bought what became — well, we bought in two weeks, or thereabouts, 14% of Occidental Petroleum.

And you’ll say, “Well, how can you buy 14% of a company in two weeks?” And it’s more extreme than that, because if you look at the Occidental proxy, you’ll see that — the standard names — BlackRock index funds, State Street index funds, basically, Vanguard index funds, and then one other firm, Dodge & Cox.

If you take those four entities — and they’re not going to buy and sell stock — they may get their own little — so they own 40% of the company, roughly, those four firms.

And they didn’t do anything during this period. So now you’re down to 60% of the Occidental Petroleum Company that’s even available for sale.

Occidental’s been around for years, and years, and years. Big company, all kinds of things.

And with 60% of the stock outstanding, I go in and tell Mark Millard, this fellow that is 30 feet away from me or so, and I say in the morning to him, you know, “Buy 20% and take blocks, or whatever it may be.”

And in two weeks, he buys 14% out of 60%. That’s not investment. (Laughter)

I mean, you’re not buying from — I find it just incredible.

You wouldn’t be able to do that with Berkshire. I mean, you can’t — literally buy it. You can say you want to buy 14% of the company. It’s going to take you a long, long time.

But, overwhelmingly, large companies in America — well, all of them — they became poker chips. And people were buying and selling like three-day calls or two-day calls. And the more people — times people pull the handle on the machine, the more money the machine makes. I mean, it’s very clear.

And overwhelmingly — I mean, where did the people go? The investors just were sitting around and there weren’t very many, and the money was being made, essentially, by a bunch of people gambling on things. And that enabled us, in a two-week period, to buy 14% of a business that’s been around for decades.

Imagine trying to buy 14% of the farms in two weeks in this country, 14% of the apartment houses, or 14% of the auto dealerships, or just anything, when already 40% were locked up some other place.

It is — it defies anything that Charlie and I have seen, and we’ve seen a lot.

But I’ve never seen that percentage of the American public — essentially, it was a gambling parlor.

And the people that were making money were people that worked with gamblers. (Laughs)

And then it declined very significantly a few weeks ago. You can feel it if you’re around it.

So, when somebody asks a very good question, this, “Why weren’t you doing anything on February 20th, and why were you doing it on — starting, well, in the case of Occidental, on February 28th?” — you know, it’s because things developed in a way —

And in the case of Occidental specifically, they’d had an analyst presentation of some — I don’t know whether it was a quarterly one or what it was exactly — but I read it over a weekend — and that was the weekend when the annual report came out — I read it over a weekend.

And what [CEO] Vicki Hollub was saying made nothing but sense. And I decided that it was a good place to put Berkshire’s money.

And then I found out in the ensuing two weeks — it was there in black and white — there was nothing mysterious about it — but Vicki was saying what the company had gone through and where it was now and what they planned to do with the money.

And she’ll do what — she says she doesn’t know the price of oil next year. Nobody does.

But we decided it made sense. And two weeks later, we had 14% of the company.

And we also already had a preferred stock and warrants. And the story of the preferred stock is we paid 10 billion — preferred stock and warrants — we paid 10 billion for it — and at the end of the March quarter of 2020, we valued that 10 billion — for our 10-Q — we valued it at 5 1/2 billion. So, we had a 4 1/2 billion loss. And it would have — you know —

The world changed. Oil sold for minus $37 a barrel (laughs) one day, and —

Now it’s quite apparent, I think, that we want — we’re very happy — we should be very happy — that we can produce 11 million barrels a day, or something of the sort, in the United States, rather than being able to produce none and having to find 11 million barrels a day somewhere else (laughs) in the world to take care of keeping the American industrial machine working.

Charlie, have you got any comments on that as to how something this crazy could’ve happened?

CHARLIE MUNGER: Well, it happened — it’s almost a mania of speculation that we now have.

We have computers with algorithms trading against other computers. We’ve got people that know nothing about stocks being advised by stockbrokers, who know even less. (Laughter)

WARREN BUFFETT: They understand the commissions, though.

CHARLIE MUNGER: It’s just an incredible, crazy situation.

And it’s weird that we ever got a system, where all this equivalent of a casino activity is all mixed up with a lot of legitimate long-term investment.

I don’t think any wise country would’ve wanted this outcome.

Why would you want your country’s stocks to trade on a casino basis to people who are just like the people that play craps and roulette in the casino? I think it’s crazy.

But it happened. And it’s respectable. Not with me, but with other people. (Laughter)

WARREN BUFFETT: Yeah — well — and look at — look at what — the country — I mean, they formed the New York Stock Exchange in 1792 under a buttonwood tree. And it really didn’t seem like that was the eureka moment in America.

But just look at what’s happened, using the system for less than — you know — well — you know — three of my lifetimes.

I mean, (laughs) it’s unbelievable. So —

It’s worked. Now, maybe it’s worked in spite of itself — maybe the country — but one way or another, America has worked in an incredible manner.

Nobody could’ve dreamt it. Nobody.

You know, they’d have hauled you away if you said — you know — in three lifetimes — you know — that — you know — this place where we’re meeting — I mean — it became a state in 1867.

But in 1789, if you’d asked Ben Franklin or somebody that was walking out of the Constitutional Convention, “What do you think the prospects are for Nebraska?” (Laughs)

It’s just — it’s unbelievable what’s been accomplished. And it’s been accomplished — the people who encouraged the gambling — they would like to say it’s been accomplished because of the — we’ve got these liquid markets and all these wonderful things.

Charlie would probably say it’s in spite of that. Who knows? (Laughter) But —

The answer is that — well, there isn’t an answer. (Laughter) The —

My wife — when we got married April 19th, 1952 — we got in my aunt’s car and we started driving west. And we ended up — we drove all over the west — but one night we ended up in Las Vegas.

And there were three fellows out there. Eddie — it was Eddie Barrick, and Sam Ziegman, and Jackie Gaughan. And all three of these guys were from Omaha. And they’d bought little pieces of the Flamingo.

Bugsy Siegel had had his career ended rather abruptly — (laughs) — a few years earlier.

CHARLIE MUNGER: By a bullet.

WARREN BUFFETT: But it was a stray bullet, undoubtedly. (Laughter)

In fact, there were probably five or six stray bullets. But in any event, Bugsy was gone.

And some people, including three guys from Omaha, were in the group. Sam Ziegman lived about two blocks from where I live now. He was Stan Lipsey’s uncle. Stan Lipsey ran — for those of you who follow Berkshire — ran The Buffalo News and was our partner for 40 or 50 years later on.

So, all kinds of things intersect.

But I walked into this casino, aged —the Flamingo — it was kind of a motel-like arrangement — and I was 21. And my bride was 19.

And I looked around the room and there were all of these people — and they were better dressed then — it was a more dignified group than, perhaps, currently — but they had flown thousands of miles in some cases — you know — in planes that weren’t as fast as the current ones and were more expensive, probably, on a per-mile basis, adjusted, then.

They’d gone to great lengths to come out to do something that was mathematically unintelligent, and they knew it was unintelligent.

And, I mean, they couldn’t do it fast enough, in terms of rolling the dice, you know, and trying to determine whether they were hot or whatever they may be.

And I looked around at that group. And everybody there knew that they were doing something that was mathematically dumb, and they’d come thousands of miles to do it, and they were —

And I said to my wife, I said, you know, I’m going to get rich. (Laughs) I mean, how can you miss? (Laughs)

If people are willing to do this, you know, this is a land of opportunity.

Well, it’s the way it still is, you know.

And the Flamingo grew to be much bigger. And in Omaha, we’re very proud of Jackie and the things he did. He only died a year or two ago.

He became sort of the leader — spiritual leader — of Vegas.

And, like I say, Sam Ziegman’s nephew went on to save my and Charlie’s investment that we made in Blue Chip and The Buffalo News. (Laughs)

And it’s a very accidental society that occurs.

But there’s nothing stranger than what has happened in finance.

On the other hand, if you go back, perhaps the greatest chapter ever written on the operation of markets, particularly the stock market, is in a book, probably one of the most famous books in economic history, The General Theory, written by John Maynard Keynes. I think it was 1936.

And I don’t know whether it’s chapter — I think it was chapter 12 — but whatever it is, he describes what markets are all about in 1936. And he describes something, in beautiful prose, that explains why the whole country in March of this year was sitting around trading Occidental in some crazy way that enabled us to buy a quarter of what wasn’t owned by four other institutions that weren’t going to sell.

But we could buy a quarter of it. And we could’ve bought a lot more. I mean — you just wondered if there was anybody that really was thinking about investment. If you —

Going back to investing, I mean, investing is laying out money now with the hope of getting back more later on. It’s really laying out purchasing power now with the hope of getting more purchasing power back.

But that’s the reason you’d — and, you know, that’s the way you learn in the textbooks, that you defer consumption now so you can consume more later on, so that you can take care of your family — all these things about how investment takes place.

And that is what happens with farms. I mean, if somebody buys a farm and they, generally, they ultimately leave it to their kids or they got it from their parents.

And, I mean, they don’t sit there every day and, you know, get quotes 15 times a day and say, you know, I’d like to get a call — I’d like to sell a put, you know, on the guy’s farm next to me. And you can have a call on mine. And then I’ll have something called a straddle or a strangle, or whatever it may be. And, you know, they just —

They go about making the farm worth more money. And they do the same thing if they’ve got an auto dealership. And they do the same thing, you know, if they’ve got an apartment house. They look to improve it and attract tenants, all those kind of things. And —

Forty — what would it be? — 40 trillion at least, you know, of the ownership of all of the American business — people treat it as poker chips or pulling the handle.

And they’ve got systems set up so that if you want to buy a three-day call on a stock, you can do it. And they make more money selling you calls than if you buy stocks. So, they teach you on calls. (Laughs)

Nobody’s going around selling calls on farms or anything of the sort.

But that’s why markets do crazy things. And occasionally, Berkshire gets a chance to do something. And it’s —

It’s not because we’re smart. It’s because we’re — the only thing I can say we’re qualified on —and sometimes I wonder about that — but I think we’re sane. You know, I mean, and that’s the main requirement in this business.

And — Charlie?

CHARLIE MUNGER: Well, I don’t think we have ever had anything quite like what we have now, in terms of the volumes and pure gambling activity that go on daily, and the people lathering the gamblers up so they can rook them.

And it’s not pretty. And I don’t find it rich in glory for capitalism or anything, anymore than a bunch of people throwing dice at a table. What good does that do the rest of the world?

WARREN BUFFETT: It’s a great way to become rich, though, just figure out ways to insert yourself into the system somehow.

And, you know, jobs to some extent self-select. And many years ago — and I’ve got all kinds of friends on Wall Street — not as many as I had before I had started talking this way an hour or so ago. But I really do. I know —

People make — they make lots of decisions in life. And the truth is that, overall, the American system has worked extremely well. It’s may be very unfair, in many ways.

But it has produced incredible difference in the goods and services available to me versus what my grandfather had available, you know.

I do not want to go back to pre-air conditioning and people pouring whiskey down me while they drill my teeth or something of the sort, or any of that. I mean, this is a lot better world. And —

CHARLIE MUNGER: Well, I think we’ve made more because of the crazy gambling. I think it’s made it easier for us, net, over the decades we’ve been operating.

WARREN BUFFETT: Well, I mean, and we’ve depended on it.

CHARLIE MUNGER: Yeah. (Laughter)

WARREN BUFFETT: I mean, we depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing of them. And overall, we learned something a long time ago, that it doesn’t take a high IQ. It doesn’t take anything. It just takes the right attitude.

We may talk more about that later, but I think we ought to prove that we’ve got an audience here by going to section one. (Laughs)