Tuesday, October 16, 2018

Warren Buffett and Charlie Munger on financial institutions

This is a response to a question about selling Fannie Mae and Freddie Mac, from the 2001 Berkshire Hathaway Annual Meeting, that I thought was worth highlighting:
WARREN BUFFETT: ...We feel there’s so much about a financial institution that you don’t know by looking at just the figures, that if anything bothers us a little bit, we’re never sure whether it’s an iceberg situation or not.  
And that doesn’t mean it is an iceberg situation, in the least, at banks or insurance companies that we pass.  
But we have seen enough of what happens with financial institutions that push one way or another, that if we get some feeling that that’s going on, we just figure we’ll never see it until it’s too late anyway.  
So we bid adieu — and wish them the best — without any implication that they’re doing anything wrong. It’s just that we can’t be 100 percent sure of the fact they’re doing things that we like.  
And when we get to that situation, it’s different than buying into a company with a product or something, or a retail operation. You could spot troubles usually fairly early in those businesses. You spot troubles in financial institutions late. It’s just the nature of the beast.  
CHARLIE MUNGER: Yeah. Financial institutions tend to make us nervous when they’re trying to do well. (Laughter)  
That sounds paradoxical, but that’s the way it is.  
WARREN BUFFETT: Financial institutions don’t get in trouble by running out of cash in most cases. Other businesses, you can spot that way.  
But a financial institution can go beyond the point — and we had banks 10 years ago that did that, en masse — but they can go beyond the point of solvency even while they still have plenty of money around.