Warren Buffett reflected on the root causes of the financial crisis in a 2010 interview. The billionaire investor discussed speculation, asset bubbles, and the dangers of using leverage. Buffett praised the Fed and Treasury for acting quickly to prevent the banking system’s collapse. Sign up here for our daily newsletter, 10 Things Before the Opening Bell. Warren Buffett explained how asset bubbles form, shared the key attribute he looks for in businesses, and warned against using leverage, in an interview with the Financial Crisis Inquiry Commission in 2010.
The billionaire investor and Berkshire Hathaway CEO also outlined the difference between speculating and long-term investing, and praised the Federal Reserve and Treasury for rapidly shoring up the financial system after Lehman Brothers collapsed.
Here are Buffett’s 10 best quotes from the interview, edited for length and clarity:1. “The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”
2. “When a management with a reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”
3. “When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years, because I’m looking to the business, Coca-Cola or whatever it may be, to produce returns for me in the future. Now, if I care whether the stock market is open tomorrow, then to some extent I’m speculating, because I’m thinking about whether the price is going to go up tomorrow or not.”
4. “The nature of Wall Street is that, overall, it makes a lot of money relative to the number of people involved, relative to the IQ of the people involved, and relative to the energy expended.”
5. “If you don’t have leverage, you don’t get in trouble. That’s the only way a smart person can go broke, basically. And I’ve always said, ‘If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.'”
6. “When people are getting paid $200,000 to $300,000 a year to be on a board, and they’re hoping to get put on some other board so they get another $200,000 or $300,000 a year, they are not exactly going to be Doberman Pinschers in terms of policing things.”
7. “The public might not understand stocks, they might not understand tulip bulbs, but they understood houses. They wanted to buy one and with the financing, you could leverage up to the sky. It created a bubble like we’ve never seen.” (Buffett added that bubbles form when people buy into a sound premise, such as ‘house prices rise over time’ or ‘stocks outperform bonds,’ but that premise becomes distorted and they end up focusing solely on price action.)
8. “The media, investors, the mortgage bankers, the American public, me, my neighbor, rating agencies, Congress — you name it — people overwhelmingly came to believe that house prices could not fall significantly. And since it was the biggest asset class in the country, and it was the easiest class to borrow against, it created probably the biggest bubble in our history.”
9. “There is seldom just one cockroach in the kitchen. You turn on the light and, all of sudden, they all start scurrying around. I couldn’t find the light switch, but I had seen one. (He was reflecting on his concerns about Freddie Mac arbitraging government credit.)
10. “The Treasury and the Fed remedied that very quickly by taking action. It was economic Pearl Harbor, and we sent out the fleet the next day. But we had the ships in the harbor, unfortunately, on the day Lehman failed.” (Buffett was saying that authorities swiftly assuaged doubts about whether they would intervene to prevent the banking system from collapsing.)
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