Unasked Question No. 2 -- Are Some of Berkshire's Bank Moats Damaged or Disappearing?
A changing bank regulatory climate has put constraints on leverage and has produced less robust return on assets and capital. As well, banking has become more homogenous and less differentiated, what Charlie and you describe as, "standing on tiptoe at a parade" -- when one bank offers a new product, every bank has to offer or match it. Given the fact that the banking industry has a lower profit growth rate potential going forward (think of it as damaged and shrinking moats of profitability), why is Berkshire continuing to acquire shares and becoming more exposed to banks, specifically Wells Fargo ( WFC)? Note: This question, too, was one of my six original questions. But, Charlie and Warren had already discussed the impact of Dodd-Frank legislation on reducing bank industry returns.
Unasked Question No. 3 -- Is The Stock Market Overvalued by Your Metrics?
Warren, generally, you abide by Casey Stengel's old adage, "Never make predictions, especially about the future," and rarely make public comments about the market. In 1999, however, you said, "One has to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%." Today, that ratio has been stretched to over 10%, or 70% above 1999's level. In the same year, you stated that interest rates "act to stock prices like gravity acts on matter." Today, interest rates are at generational lows and have little to go but up due to the "invisible pull of gravity." Despite these concerns, you said recently on CNBC that you're buying stocks. If interest rates are unlikely to fall much further and corporate profitability in relation to GDP must drop, then stocks, by your two key measures, are meaningfully overpriced today. It's got to be one of two alternatives. Which is it, Warren? Are investors seriously overestimating future profit growth? Or is it different this time so that neither interest rates nor profit margins will mean-revert -- that these factors have lost their relevance and investors are right? Note: This question was among my first six, but it was asked by another questioner, though I forgot which one.