One of the ironies about Warren Buffett's philosophy on investing is that, while he recommends that most investors can't beat the broader market and should therefore only invest in low-cost index funds, his model at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) presupposes that he'll be able to. And for the most part, he's been right.
How does Buffett accomplish this? As Gaby Lapera and John Maxfield discuss in the latest episode of Industry Focus: Financials, he waits until corrections in the market before he really begins to pour Berkshire's cash into stocks.
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A full transcript follows the video.
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This podcast was recorded on March 6, 2017.
Gaby Lapera: I want you to do one thing for me beforewe get on to the next Buffett thing, which is,pick out a quote that really stood out to you in this letter, and tell me about it.
John Maxfield:Ohmy God, I'm so glad you asked me that. We didn't prep for this ahead of time,but I have one for you, Gaby! It'syour lucky day, it's your birthday a week and a half early!
Lapera:Thank you; this is what I've always wanted!
Maxfield:So in the conversation of the letter,in the very beginning of it,the first two paragraphs of Buffett'sconversation -- and when you're a guy like Buffett, he is so smart, he knows how to order his letters. So there is significance to where in the lettercertain things fall. And the closer to the beginning, they'reprobably pretty important. So he spends the first two paragraphs talking about this fact that,because they're getting so big, theirreturns aren't going to blow out of the market every year like they used to. Butthen, in the third paragraph, after teeing that up, he talks about the fact that, what you're going to see withBerkshire is that our returns are going to be lumpy. There aregoing to be some years where we have huge returns. It's in this context that he says this quote. "Every decade or so,dark clouds will fill the economic skies,and they will briefly rain gold. Whendownpours of that sort occur, it'simperative that we rush outdoorscarrying wash tubs, not teaspoons. And that we will do." So,what he's basically saying is that, "Look, we haveaccumulated an enormousamount of cash," andI don't have it off the top of my head, but,tens of billions of dollars' worth of cash that they're waiting to pool in on investments. And basically,what he's saying is,at this point, now, they're just waiting for that opportunity.
Lapera:Yeah. Which willmaybe give them a little spike above theS&P 500.
Maxfield:That'sexactly right. But it also speaks to where Buffett's brain is at,in terms of what he's thinking about the market. We know that the market has correctionsregularly. Warren Buffett is basically saying, "I'mwaiting for a very large correction." So you can work backwards from that.
Lapera:Yeah,which will be really interesting. Maybesome of these gains that we've seen, the "Trump bump" as some people are calling it, might be washed away. Butthat's also just the nature of the market.
Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.