Warren Buffett said on Saturday that US financial markets had become “almost totally casino-like” as millions of new traders flooded into the financial system during the pandemic.
The billionaire and chief executive of Berkshire Hathaway, speaking in Omaha to thousands of shareholders gathered for the company’s annual meeting, added that the “extraordinary” activity had been “encouraged by Wall Street because the money is in the turnover of shares”.
The comments follow a sea change in the way people around the world interact with their finances. Americans have opened millions of brokerage accounts since the pandemic began, and many have turned to the options markets to bet on the rapid rise or fall of companies like Apple and Tesla.
Buffett and his adviser, Berkshire Vice Chairman Charlie Munger, attributed the rapid pace of trading and the fact that many holders of certain stocks were not long-term investors for the company’s ability to make its own big bets this year.
In the first quarter, the company spent $51.1 billion buying stocks of companies, including big bets on oil majors Chevron and Occidental Petroleum. Buffett said it was “incredible” that Berkshire was able to buy more than 14% of Occidental in a matter of weeks.
“But the overwhelming majority of big American businesses became poker chips and people were buying and selling like three-day calls, two-day calls,” he said, referring to derivatives that are become the instrument of choice for many new day traders in the market. “Wall Street makes money one way or another, picking up the crumbs that fall off the table of capitalism.”
There are signs that much of the enthusiasm that propelled US stocks to record highs last year has evaporated. Trading in penny stocks has collapsed and the amount of borrowing investors take out to trade has fallen, according to US watchdog Finra.
Munger was specifically targeting Robinhood, the online brokerage that has brought many Americans to the financial markets but whose valuation has fallen from nearly $60 billion last August to $8.5 billion last week as business business has slowed.
“Short-term play and big commissions . . . it was disgusting,” he said. “Now it’s unraveling. God is getting fair.
Saturday is the first time since 2019 that Berkshire shareholders have had the chance to hear directly from the billionaire investor and the company’s senior management in person.
There were questions ahead of the annual meeting, often called Woodstock for capitalists, about whether the pandemic would affect attendance levels. Officials from several Berkshire subsidiaries said turnout at the Omaha convention center on Friday, a day when shareholders can buy Fruit of the Loom underwear or get discounted home goods at The Pampered Chef, had been lower than in recent memory.
But when Buffett opened the meeting, with his usual one-word, “OK” retort, a large audience at the CHI Health Center stood up.
Investors still have several hours to wait before hearing the outcome of the day’s real business – whether shareholders succeeded in advancing proposals that would force Berkshire to disclose the environmental impact of its dozens of subsidiaries or whether they will split the President and the Managing Director Title. Analysts expect the proposals to fail given that Buffett owns high-class voting stock.
The company said earlier on Saturday that its operating profits were little changed from a year earlier, with strength in its railroad and BNSF manufacturing units offsetting a sharp decline in profitability in its insurance business. .
Overall, net income more than halved from a year earlier to $5.5 billion. The decline was primarily due to changes in the value of his investments, which Buffett laments as a “generally meaningless” measure given his stock portfolio eclipsed $390 billion in value.
Buffett was asked about the surge in recent stock buying after lamenting the lack of attractive investments in his annual letter to investors in February. He said that during the market sell-off this year, “a few stocks became very interesting for us and we also spent a lot of money.”
But he added that the mood at the company’s headquarters had become more “lethargic”, especially compared to the pace recorded between mid-February and mid-March when it spent more than $40 billion in shares.
Berkshire drew down a significant portion of its cash to execute those deals, with the value of its cash and treasury bill holdings falling to $106 billion, its lowest level since 2018.
Buffett said the company will always retain a significant amount of cash, given its insurance operations need to be prepared for large claims in the event of a disaster. He added that he wanted Berkshire Hathaway to be “able to operate if the economy shuts down and that can still happen.”
“We had a lot of money on March 20,” he said, referring to the days when the S&P 500 hit pandemic lows. “But we weren’t very, very far from having anything like a repeat of 2008 or even worse.”