This morning’s Wall Street Journal ran an editorial entitled, “Warren Buffett on Wall Street Gambling. Seems the WSJ editorial board took issue with Buffett & Munger calling out Wall Street for the way they promote “gambling” activity.” They wrote:
“Warren Buffett is apparently shocked, shocked to find gambling going on in financial markets. That was the headline from the Berkshire Hathaway CEO’s remarks at its annual meeting on Saturday in Omaha. “It’s a gambling parlor,” Mr. Buffett said, and he blamed the financial industry for encouraging risky and speculative behavior.”
That Buffett and Munger called out Wall Street for croupier like behaviour shouldn’t surprise anyone. They’ve been doing it for decades. They and value investors of all stripes have long distinguished between “investing,” “speculating” and “gambling.” It’s even the first issue addressed by Ben Graham – Buffett’s teacher and mentor in The Intelligent Investor (Chapter One, paragraph 1).
For Buffett, investing means “laying out money now with the reasonable expectation that you will receive more later.” And to further quote Ben Graham, “investing is most intelligent when it is most business like.” It’s why Buffett has always made decisions based on business fundamentals, not unbridled speculation. His focus has always been on “productive assets” and he addressed that during the meeting.
Speculation on the other hand, utilizes the “greater fool theory.” You purchase some item – tulip bulbs, pet rocks, chia pets, Netscape shares, hockey cards, cryptocurrencies, NFTs, etc. with the hope that some other fool will pay you more for that item at a later date. The item’s utility is irrelevant. These ideas haven’t changed. So, what has?
Well, a few things and they tried to address some of them.
First, Charlie noted how computer algorithms compete against other computer algorithms to make split second trades. The folly of this method stems back as far as the crash of ’87, but the computers are much quicker and far more sophisticated now. The potential for loss has increased exponentially. So has the number of people effected.
Second, neither has been impressed with Robinhood or any of the quick trade, no fee apps that surfaced during the pandemic. Platforms encouraging people to make rapid fire trades without any consideration to business fundamentals is tantamount to gambling. It’s how you turn a coveted American capitalist institution like the NYSE into a gambling parlour. It’s nothing really to aspire to. As Charlie said, “We have people who know nothing about stocks being advised by Wall Street people who understand even less. Why would you want your country’s public companies being traded like it’s a casino?”
See: Berkshire Hathaway’s Charlie Munger Takes Another Swipe at Robinhood (published the day after this blog was posted).
Finally, the two took aim at Bitcoin and other the cryptocurrencies. Buffett went on to explain the value of the greenback and currency that was authorized by the U.S. Federal Reserve. “Right on the bill in the lower corner it reads, “this note is legal tender for all debts, public and private.” It’s how you pay the IRS. IF you offered me all the Bitcoin in the world for $25, I wouldn’t pay it.”
The WSJ board suggested Warren and Charlie were unfairly scapegoating Wall Street and addressing symptoms vs. the actual problem. According to the board, “greed” is the real driving force and it’s not going away anytime soon as if to suggest, they’re just filling a need.
Well, that could be, but it’s not like that attitude is going to move humanity further along. I’m inclined to agree with Ben, Warren, and Charlie. Investing is most intelligent when it is most businesslike.”