OMAHA, Neb. - This city's stock-picking Oracle says the market party's over.
"We do not think the general ownership of equities is going to be very exciting over the next 10 to 15 years,"
told investors at today's
annual meeting. Buffett's comments came in response to a question about his decision to trim at least 25 million shares of
from Berkshire's portfolio last year. The entertainment giant had been a long-time core holding for Berkshire.
While Buffett seldom discusses the market and Berkshire's positions, he indicated that his sale of Disney shares was part of a general reduction in Berkshire's exposure to equities. "Our ownership
of Disney fell below the
reporting threshold although we still own Disney," Buffett said, referring to his self-imposed guidelines of revealing only Berkshire positions in excess of $750 million in market value. "We have mildly reduced our equity positions in the past year."
Berkshire Vice Chairman
called for limits of another kind. "I think we are in for reduced expectations for the kind of returns people have had investing in stocks," he said, suggesting that investors lighten up on their hopes for unrealistic returns. "I think you can have very unreasonable expectations in life and it makes life so much more miserable."
That's not to say Berkshire won't put its cash back to work, Munger added. "Give us reasonable opportunities and we are prepared."
During a seven-hour question-and-answer period in an arena filled with nearly 10,000 Berkshire investors from the U.S. and abroad, Buffett and Munger fielded queries on everything from the stock market and technology to Berkshire's insurance operations.
Potholes on Wall Street
"There is no good for the mania," Buffett proclaimed, responding to a question about the continued "random speculation" in the markets. He said he remains concerned about the ultimate end to the bubble.
"Anytime there have been real bursts of speculation in the market, it always gets corrected eventually," he said. "In the long term, the amount of cash a company has commands the value of a company in the market."
Buffett said his biggest concern is the false sense of wealth among investors caused by the run-up in the prices of companies with no profits. "There is a tremendous amount of wealth transferred but none being created," he said. "Investors as a whole gain nothing. They all feel richer but they can't all end up richer as a group."
He compared the excitement such speculation creates to the thrill of the early rounds of one of the oldest money scams. "It's the same principal as a chain letter. There is no wealth created by a chain letter," Buffett said. "There are actually frictional costs like envelopes and postage. Trading
speculative stocks is no different."
Still, Buffett acknowledged that just like a successful chain letter, the speculation could continue for the foreseeable future. "In the end valuation does count, but it can go on for a long time. When you have a growing number of participants with ever-growing sums it can last a long time."
In response, Munger was his typically glib self. "I think the reason we use the term 'wretched excess' is there are wretched consequences," he said. "If you mix the chain letter or Ponzi scheme with something like the Internet, you mix something very bad with something very good. But, if you mix raisins with turds, you still have turds."
Even so, Buffett isn't convinced the damage will extend far beyond those who have been in the game. "Whether
the end of speculation has fallout for the whole economy like it did in the '20s, or whether it's a limited event is difficult to know, but the chances are it will be more limited."
The Effect of the Internet
In response to a question from a 10-year-old shareholder about the impact of the Internet on Berkshire's operating businesses, Buffett said all of Berkshire's subsidiaries are weighing options presented by emerging technologies. "You are absolutely right that we should be thinking all the time about how technology might threaten our businesses and how it will benefit us," he said.
He said his biggest fears concern the newspaper business. Berkshire owns
The Buffalo (N.Y.) News
, as well as more than 18% of
The Washington Post
. "Newspapers are a category, in my view, that are very threatened by the Internet," he said. "The newspaper business will look very, very different in not too many years."
Buffett added that the competitive pressures of new technology make the traditional business less appealing, and questioned the recent valuations of newspapers. "People in the newspaper business are schizophrenic," he said. "They see the technology, they try to combat it, but they still go out and buy papers for prices that would have been paid 20 years ago. They still have their billfolds in the past, which isn't terribly rational."
Buffett went on to describe the challenges Berkshire's
encyclopedia subsidiary has faced because of new technology and the Internet. "World Book was put together in a way that for 400-500 years was the best technique for moving
information," he said. "The Internet has changed that in a very major way.
It has virtually no incremental unit costs and can deliver information instantaneously."
As for Berkshire's other retail businesses -- from insurance to jewelry, Buffett says the Internet is a two-edged sword. "Our retailing businesses are all threatened by the Internet, but there may be opportunities as well."
The man who has befriended
, but assiduously avoided buying technology stocks for Berkshire, had few good words for the government proposal to break the software giant in two. "
Software development will be more and more important -- it will be fueling the development in most of the world," Buffett said. With Microsoft, "I think we have something working very well that doesn't make a lot of sense to tinker with very much. I wouldn't want to go in with a meat axe to something that is pulling this country along in a huge way. I don't think you want to tinker with success."
Reassuring on Insurance
, the insurer acquired by Berkshire in 1998, Buffett acknowledged that significant errors in the past resulted in a $1.4 billion operating loss in 1999. "It was a mistake, and it shouldn't have been made," he said. "We have set aside a reserve of $275 million which should take care of the rest of the problem. Many others made the same mistake but that doesn't mean we should have done it."
Buffett reminded shareholders that the insurance business is prone to surprises, most of them negative, but said the business remains strong. "Surprises are unpleasant nine times out of 10. But they do happen. Gen Re has a terrific record over time."
Overall, however, Buffett seems inclined to make insurance the focal point of Berkshire's future growth. "I think insurance will turn out to be a very, very good business over time for Berkshire," he said. "It's the best one I know about that we can do scale in over time."
On Thursday, Berkshire quietly announced it would acquire
U.S. Investment Corp.
, a Pennsylvania-based privately held insurance holding company.
Tomorrow: After the traditional baseball game Saturday evening (Buffett owns a stake in the Omaha Golden Spikes), Buffett will meet the press Sunday, capping off the shareholder weekend.
Don't forget to join us on the message boards to weigh in with your thoughts. And, on Tuesday, join myself and Robert Hagstrom, portfolio manager of the
LeggMason Focus Trust
and author of
The Warren Buffett Portfolio
for a chat about Buffett, Berkshire and the annual Capitalist Woodstock.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds had no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at