They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle…Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen…
I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that everything was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall.
And that’s what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall.
Warren Buffett’s answer to “What are the key lessons you took from the financial crisis?”
Kevin
on 29 Mar 11But that wasn’t Capitalism. That was Corporatism.
CRC
on 29 Mar 11+1 what Kevin said. Corporatism + The Fed (which creates and pops most if not all of the bubbles we see.)
David Andersen
on 29 Mar 11It wasn’t just corporatism. People at every level – realtors, home buyers, appraisers, brokers, lenders, securities dealers, investment bankers, investors, financial raters, government bureaucrats, and politicians – had a hand in this. They all wanted the music to keep playing and the drinks to keep flowing. And Buffet’s right, this lesson has been played out over and over in history. It will again.
Ryan Jenkins
on 29 Mar 11+1 for David. It happened at every level. So many people have been living outside their means. If you spend less than you make, and you’ve saved up a bit of money then the downturn was a great opportunity to buy low (homes, stocks, etc.). The few individuals/companies that were able to do so have come out of this thing stronger than ever.
Rebecca
on 29 Mar 11+1 for this entire conversation. It’s refreshing to see us think critically about why we’re in the financial crisis we’re in. Ultimately, I do think it’s a combination of factors that led into each other – with corporatism leading the way.
Ian
on 29 Mar 11Agree bubbles will repeat. Doesn’t take a billionaire genius to figure this one out. His advice is superficial, wrong and at best not useful. Given his experience with risk and business I’d expect him to offer more.
The suggestion that we shouldn’t have long term debt is silly, so no one should go to college? Making investments in physical infrastructure is out too, goodbye Internet.
Sounds like he’s basically saying to avoid financial losses due to group think don’t group think. Not helpful.
This is a fundamental problem, the risk models everyone had were wrong. In fact the nature of the mathematics behind them (fractal) makes it impossible to accurately model the risk based on historical data. If you don’t know how much risk you really have then how can you avoid more than you can handle?
Jeff
on 29 Mar 11@Ian
I take what Buffet means here is never own any money you can’t repay with reasonable certainty in a known amount of time … not literally tomorrow. And how much long-term debt do we really need? Work through college to decrease or eliminate debt – lots of people still do it. Infrastructure investments can be made smartly if you know with good certainty that you can pay off the debt before it cripples your business (or nation) and renders you unable to compete.
That one is still pretty simple in spite of fractal based risk models. If you don’t understand the risk, then you have more risk than you can handle. I submit that’s exactly what happened to a lot of home owners who purchased exotic sub-prime mortgages … they simply didn’t understand the risk.
These principles are solid, simple, and they work at every economic level: personal, family, business, market, national.
Brian Dunbar
on 29 Mar 11The suggestion that we shouldn’t have long term debt is silly, so no one should go to college?
It is possible to attend college without incurring long-term debt. I agree with Jeff – he’s not talking a literal tomorrow but a metaphorical one.
And he’s right. I had a neighbor who spent a lot of money and time on a degree. Did it the hard way, nights and weekends, part time. He was rightly proud of the work he put into it, and at the age of 50 he was the first one in his family to earn a BS.
The day after he graduated he was back hard at work on his day job, running a book binding machine. With a mortgage and an expensive degree he’ll never use.
Ian
on 29 Mar 11Yes, if you speculate he really meant something else you can patch up his assertion.
@ Jeff – A serious couple of questions though: Lets forget about a naive home buyer who frankly will always exist. Assume we are lender who does comprehend the mortgage market enough to realize that we can’t model its risk accurately, should we as a policy just avoid giving out mortgages? Should anyone give out home loans noting that we can’t accurately predict future risk? What standard for “understand” do you (or anyone else) propose?
Tim
on 29 Mar 11Real capitalism would have seen all the dodgy joker banks fold.
Quick recession. People fired. No expansion in Fed balance sheet (I live in Australia so this is all observations from reading from afar). Cut company taxes, payroll tax (if you have it there) – make it easy to rehire.
Capital redeployed to areas with a real ROI as companies that are still solid and who had spare capital could redeploy it.
As I said, quick recession, limited debt expansion, quick return to growth.
As it stands the transfer of private losses to the public is one of the most criminal things I’ve ever seen take place. It is a disgrace. The US taxpayer should be up in arms over it.
David Andersen
on 30 Mar 11@Ian – Buffett writes and speaks like that all the time – he’s not being precisely literal. He does mean “in the future”. And in this case he means don’t take on debt that you don’t reasonably believe you can pay back later (for, I’m sure he’d add, a killer rate). The average person who borrows 80k to get a degree in literature or philosophy is probably not making a wise decision. Of course there are exceptions.
David Andersen
on 30 Mar 11@Tim, I agree. Many taxpayers, however, aren’t paying much attention and many of them don’t have the education to understand what’s happened.
There has been, however, more clamoring and unrest with the federal government over this than there has been in a long time (since the good old Carter years in the 70s.)
GregT
on 30 Mar 11Most American taxpayers are too dumb to understand what’s going on? Oh. I see.
Geoff
on 31 Mar 11I’m impressed to see so many commenters correctly identify our economic playing field as Corporatist rather than Capitalist—especially when it comes to real estate and finance.
Also, having read only a little about Buffett, I believe he’s using “tomorrow” literally rather than figuratively.
Trent
on 03 Apr 11Little if any of his advice applies to individual Americans today. When real interest rates are negative, the name of the game is arbitrage. Borrow as much as possible to speculate in an asset that returns more than your interest rate, and put the difference into your offshore bullion account. Long live the carry trade!
This discussion is closed.