Lessons from Warren Buffett on his 90th Birthday

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Berkshire Hathaway shareholder Bill Smead, CIO of Smead Capital Management, about what we can learn from Warren Buffett on his 90th Birthday.

Video Transcript

BRIAN SOZZI: All this week we're celebrating the Oracle of Omaha, Warren Buffett, as he marks his 90th birthday on Sunday. And of course, there are lessons we can all learn from Buffett when it comes to investing. Luckily for us, he shared the most important investment that we all need to make right here on Yahoo Finance. Take a listen.

WARREN BUFFETT: By far the best investment you can make is in yourself. For example, communication skills. I tell the students that come-- they're going to graduate schools in business, and they're learning all these complicated formulas and all that-- if they just learn to communicate better, both in writing and in person, they increase their value at least 50%. If you can't communicate, somebody says, you know, it's like winking at a girl in the dark. Nothing happens, you know, basically.

And you have to be able to get-- get both your ideas, and-- and that's-- that's relatively easy. I did it myself with a Dale Carnegie course. Some people wish I'd taken a shorter course, in terms of my talking later on. But it-- it's just hugely important. And if you invest in yourself, nobody can take it away from you.

BRIAN SOZZI: All right, let's bring in Bill Smead of Smead Capital Management. He is a longtime Berkshire Hathaway shareholder. Bill, always good to speak with you. I've always viewed you as the Buffett whisperer. So after all these years of holding Berkshire stock, what's the biggest investing lesson that Mr. Buffett has given to you?

BILL SMEAD: Well, I think buying good quality securities when people are scared to death, being greedy when others are fearful in meritorious companies. You just had a segment on Ulta, and we-- we bought some Ulta earlier this year during all the-- the concerns. And you know, we're off to a pretty good start with it.

It's a pretty wonderful business. And I don't think that people are not going to-- young ladies are not going to want to put their makeup on. So Buffett was big in stepping into high-quality businesses at a time of great distress, and then holding for a long time, those two things.

ALEXIS CHRISTOFOROUS: You were pretty clear, Bill, earlier this summer in your criticism of Buffett and his longtime cohort Charlie Munger. You said that they were scared by the economic downturn. Do you still believe that?

BILL SMEAD: Well, yes. My criticism was mainly-- you know, there's kind of two camps to value. One camp is what I just mentioned. You take a highly thought of growth company, and everybody stumbles at some point in time. Everyone stumbles, although you wouldn't think so if you watch what's been going on in the market lately. But everyone stumbles, and who's ready and has the courage to step in.

The other camp in the growth camp is what he was taught by Ben Graham. You know, he went and lived in New York City and worked for Graham-Newman. And Ben Graham would buy 100 stocks that were selling at 50% of their liquidation value.

Well, the best trades, the best buys at the lows in March and April were the Ben Graham ideas, and he never mentioned a word about that. He didn't say, well, we can't really do the Ben Graham thing because we have way too much capital. So it wasn't a great time to be scared if you are a Ben Graham investor. It-- and it didn't end up being a great time to be scared for anybody, thanks to the Federal Reserve Board.

BRIAN SOZZI: Bill, as a Berkshire shareholder, do you believe it's time for Warren Buffett to pass the baton?

BILL SMEAD: Well, he already is passing the baton. For example, one of your competitor organizations put out that Buffett's favorite indicator, the market capitalization of the US stock market to the GDP, broke a record yesterday. It's the highest it's ever been. And so Buffett, whenever you get in a crunch like we did in '08 and '09, he looked at the market trading for 0.75 of the GDP and said this is a pretty good time to buy, not because he had any optimism about what was going on, but because if you look at 60, 70 years of history, that is a pretty good point at which to-- to buy.

So now we're at the opposite end of that spectrum. And Buffett is holding cash and positioned his portfolio for lousy S&P 500 results the next five to 10 years. You can just see it in his actions. He is playing max caution, max defense right now, while the rest of the market is out there dancing in delight.

ALEXIS CHRISTOFOROUS: What do you make of some of Buffett's moves this past summer? I mean, you had Buffett, he bet-- he bet on the big four airlines against his own advice, then he dumped them at a loss. He also cut his holdings in JP Morgan and Wells Fargo. And he invested in Barrick gold. What does that tell you about Warren Buffett, or at least the people who are making the decisions at Berkshire Hathaway?

BILL SMEAD: We haven't found out yet, but I'd bet every dollar in my checking account that one of his underlings bought the Barrick gold in the same way one of his underlings bought the Amazon. And by the way, the underling did quite well on the Amazon. It's probably almost doubled from where they bought it.

So that would be Todd Combs or Ted Weschler that did that. The-- the answer is he-- again, he built his cash position, despite spending $5 billion on his own stock and adding to his Bank of America position. So the answer is, he is playing max defense right now.

BRIAN SOZZI: Bill, I was going to ask you real quickly about-- you mentioned the market capitalization Buffett indicator-- and I wrote about that about two weeks ago-- starting to hit worrisome levels. Do you think that's a measure-- is it an outdated measure? Are you concerned about the levels where that sits now?

BILL SMEAD: Boy, I love your question. Matt Nathanson had a song the last couple of years, and the tagline was I've got a king-sized bed and a PhD in the way things used to be. And when you're a value manager like us that owns quality value and buys outstanding and wonderful businesses when they get distressed, and you watch novices buy futuristic, expensive stocks and make a whole bunch of money, and watch the most aggressive growth managers just shoot numbers up the tree like you can't believe, you feel like you're an old-timer and you don't know what you're doing anymore.

And I can tell you that-- that when everyone knows that something is so, nobody knows nothing. And when those 80 and 100 time PE multiples become 25 multiples, heartache and agony is going to get inflicted on people and those of us that stick to our tortoise disciplines of owning very attractive and reasonably priced securities. I mean, let me just give you one example.

We looked at a chart yesterday of the price of oil in relation to gold. And in the last 40 years, the range has been 2% of the-- of the gold price to 16% of the gold price. And right now it's 2.2%. So-- so people are super excited about gold in relation to oil. They hate oil. They love ESG.

They-- they love the Green New Deal concepts, et cetera, et cetera. But let's face it, for the next 20 years, the United States economy is going to exist on gasoline. And we just started moving millennials around the country and forced them to buy a car, and millennials are going to use twice as much gasoline in 10 years as they do right now. And what do you think the price of oil is going to do?

BRIAN SOZZI: Well, we'll have to leave it there for now. But Bill Smead, let them have it. Always good to see you, and have a great weekend.

BILL SMEAD: Thank you. Have a great weekend.