Gambling on stocks is a bad bet, Berkshire’s Buffett says
Warren Buffett has a message for Main Street investors: Treating the stock market like a casino is a bad bet.
The CEO and chairman of Berkshire Hathaway warns that wagering on stocks with borrowed money or loading up on exotic investments is akin to gambling. Investing in well-run companies whose products generate strong sales and profits is a better long-term investment strategy than a get-rich-quick approach.
“A lot of people like to gamble in the stock market,” the billionaire investor, who released his closely watched annual letter to shareholders over the weekend, said Monday in an interview with CNBC. “It is insane. To risk starting all over again and losing everything is madness.”
Buffett’s comments come amid a volatile period for the stock market, including its first 10% plunge in two years this month. The bull market, which turns 9 next month, has helped the Dow Jones industrial average quadruple in value since March 2009.
Signs of investors treating Wall Street like a Las Vegas casino are cropping up more frequently.
At the end of January, investors had a record $665.7 billion in borrowed money, or “margin debt,” invested in all sorts of securities, according to the Financial Industry Regulatory Authority. The risk, FINRA says, is if the price of an investment bought on margin plunges, investors might have to raise cash to meet the minimum balance requirements in their brokerage accounts. These so-called “margin calls” often result in forced selling of stocks by investors to get the needed cash.
“There’s no reason to borrow money against stocks unless you are in a hurry to get rich and willing to go broke,” Buffett said.
Another sign of investors taking more risk, Buffett said, is the mania surrounding digital currencies such as bitcoin and the buying of “super-charged” index funds that bet on things such as market volatility, rather than a company such as Apple that sells in-demand products and earns sizable profits.
“There are ways to get rich slowly,“Buffett said.
He said investors must realize that it’s impossible to predict what will happen in markets or the world and that the only way to survive bad times is to invest in companies that are strong enough to weather catastrophic events.
Even though Berkshire Hathaway has $116 billion in cash available for investment, Buffett says his disciplined approach keeps him and his company out of danger.
The Oracle of Omaha shared other investment tidbits: ❚ Buying stocks is a good deal: While Buffett thinks the market for acquisitions — or buying entire companies — is too pricey, investors can purchase company shares at much better prices, he said. The reason: When purchasing a company, the buyer normally pays a “premium” price to get a deal done. The price of the actual stock has no such premium built in, he said. ❚ Don’t count on a dividend payout: While Buffett is sitting on a pile of cash, he downplayed, as he always does, the chances of Berkshire giving back some of the cash to shareholders via a onetime cash dividend or by starting a regular dividend payout. Berkshire doesn’t pay dividends. Buying back Berkshire shares is a more likely use of the extra cash, Buffett said.
He noted that once you pay a regular dividend, shareholders think you will “pay it forever.” In contrast, buybacks, he said, boosts a firm’s earnings per share, which “provides ongoing benefits to shareholders.” ❚ How to create “income” with Berkshire shares: Even without a dividend payout, Buffett said there’s a way for investors to generate income off of their Berkshire stock. “You can sell a little piece of Berkshire each year and still end up owning more of it,” noting that shares typically rise in value each year. “It’s the equivalent of a dividend.”