Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013

by Carol J. Loomis

So I would say that a lot of things in business, including technology, really have the same effect as if you went to a parade and the band started coming down the street and all of a sudden you stood up on tiptoe. In another 30 seconds everybody else is on tiptoe, and it would be hell on your legs and you still wouldn’t be seeing any better. Capitalism tends to be self-neutralizing like that in terms of improvements. That’s marvelous because it means we have better everything than otherwise. But the real trick is to stand up on tiptoe and not have anyone notice you.

I hope the one I made yesterday was a good one. But they’ve always been kind of simple and obvious to me. The truth is, you know them when you see them. They’re so cheap. When I got out of Columbia University, I went through the Moody’s manuals page by page—the industrial manual, the transportation manual, the banks and finance manual—just looking for things. And I found stocks at one times earnings. One was Genessee Valley Gas, a little tiny company up in upstate New York, a public utility selling at one times earnings. There were no brokerage reports on it, no nothing, but all you had to do was turn the page. It worked out so well I actually went through the book a second time.

I’ve got another letter that’s addressed that will go out at the time, and it starts out, “Yesterday I died,” and then tells what the plans of the company are.

We both have a similar philosophy on that. I know in my own case that 99%-plus will go back to society, just because we’ve been treated extraordinarily well by society. I’m lucky. I don’t run very fast, but I’m wired in a particular way that I thrive in a big capitalist economy with a lot of action. I’m not adapted for football, I’m not adapted for violin playing. I happen to be in something that pays off huge in this society. As Bill says, if I had been born some time ago I would’ve been some animal’s lunch. I do not believe in the divine right of the womb. Frankly, I don’t think it’s right that the quarterback of the Nebraska football team next year should be the eldest son of the quarterback of the Nebraska football team of 22 years ago. Nor do I think that our Olympic team in 2000 should be chosen from the same family that was on the Olympic team in the various respective sports in 1976. We believe in a meritocracy when it comes to athletics and all sorts of things. Now, why not have a meritocracy in terms of what you go out into the world with in terms of the productive goods? Let the resources flow to those who use them best, and then I believe they should give them back to society when they get through.

Let me suggest another way to think about this. Let’s say that it was 24 hours before you were born, and a genie appeared and said, “You look like a winner. I have enormous confidence in you, and what I’m going to do is let you set the rules of the society into which you will be born. You can set the economic rules and the social rules, and whatever rules you set will apply during your lifetime and your children’s lifetimes.” And you’ll say, “Well, that’s nice, but what’s the catch?” And the genie says, “Here’s the catch. You don’t know if you’re going to be born rich or poor, white or black, male or female, able-bodied or infirm, intelligent or retarded.” So all you know is that you’re going to get one ball out of a barrel with, say, 5.8 billion balls in it. You’re going to participate in what I call the ovarian lottery. It’s the most important thing that will happen to you in your life, but you have no control over it. It’s going to determine far more than your grades at school or anything else that happens to you. Now, what rules do you want to have? I’m not going to tell you the rules, and nobody will tell you; you have to make them up for yourself. But they will affect how you think about what you do in your will and things of that sort. That’s because you’re going to want to have a system that turns out more and more goods and services. You’ve got a great quantity of people out there, and you want them to live pretty well, and you want your kids to live better than y...

Buffett said the committee should require the auditors to give detailed answers to three questions: If the auditor were solely responsible for preparation of the company’s financial statements, would they have been done differently, in either material or nonmaterial ways? If “differently,” the auditor should explain both management’s argument and his own. If the auditor were an investor, would he have received the information essential to understanding the company’s financial performance during the reporting period? Is the company following the same internal audit procedure the auditor would if he himself were CEO? If not, what are the differences and why?

Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future—more money in real terms, after taking inflation into account.

The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate. Consequently, every time the risk-free rate moves by one basis point—by 0.01%—the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect—like the invisible pull of gravity—is constantly there.

In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there—in that tripling of the gravitational pull of interest rates—lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.

The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart on the facing page displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.

As you can see, corporate profits as a percentage of GDP peaked in 1929, and then they tanked. The left-hand side of the chart, in fact, is filled with aberrations: not only the Depression but also a wartime profits boom—sedated by the excess-profits tax—and another boom after the war. But from 1951 on, the percentage settled down pretty much to a 4% to 6.5% range. By 1981, though, the trend was headed toward the bottom of that band, and in 1982 profits tumbled to 3.5%. So at that point investors were looking at two strong negatives: Profits were sub-par and interest rates were sky-high.

And as is so typical, investors projected out into the future what they were seeing. That’s their unshakable habit: looking into the rear-view mirror instead of through the windshield. What they were observing, looking backward, made them very discouraged about the country. They were projecting high interest rates, they were projecting low profits, and they were therefore valuing the Dow at a level that was the same as 17 years earlier, even though GDP had nearly quintupled.

Now, what happened in the 17 years beginning with 1982? One thing that didn’t happen was comparable growth in GDP: In this second 17-year period, GDP less than tripled. But interest rates began their descent, and after the Volcker effect wore off, profits began to climb—not steadily, but nonetheless with real power. You can see the profit trend in the chart, which shows that by the late 1990s, after-tax profits as a percent of GDP were running close to 6%, which is on the upper part of the “normalcy” band. And at the end of 1998, long-term government interest rates had made their way down to that 5%. These dramatic changes in the two fundamental...

Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors—those who have invested for less than five years—expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%. Now, I’d like to argue that we can’t come even remotely close to that 12.9%, and make my case by examining the key value-determining factors. Today, if an investor is to achieve juicy profits in the market over 10 years or 17 or 20, one or more of three things must happen. I’ll delay talking about the last of them for a bit, but here are the first two:

Interest rates must fall further. If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks. Incidentally, if you think interest rates are going to do that—or fall to the 1% that Japan has experienced—you should head for where you can really make a bundle: bond options. Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that’s the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.

So where do some reasonable assumptions lead us? Let’s say that GDP grows at an average 5% a year—3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don’t have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be. Nor can investors expect to score because companies are busy boosting their per-share earnings by buying in their st...

So I come back to my postulation of 5% growth in GDP and remind you that it is a limiting factor in the returns you’re going to get: You cannot expect to forever realize a 12% annual increase—much less 22%—in the valuation of American business if its profitability is growing only at 5%. The inescapable fact is that the value of an as...

Now, maybe you’d like to argue a different case. Fair enough. But give me your assumptions. If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, “Well, that’s because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level.” Or you’ve got to rearrange the...

Beyond that, you need to remember that future returns are always affected by current valuations and give some thought to what you’re getting for ...

Bear in mind—this is a critical fact often ignored—that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices. Let’s say the Fortune 500 was just one business and that the people in this room each owned a piece of it. In that case, we could sit here and sell each other pieces at ever-ascending prices. You personally might outsmart the next fellow by buying low and selling high. But no money would leave the game when that happened: You’d simply take out what he put in. Meanwhile, the experience of the group wouldn’t have been affected a whit, because its fate would still be tied to profits. The absolute most that the owners of a business, in aggregate, can get out of it in the end—between now and Judgment Day—is what that business earns over time.

Let me summarize what I’ve been saying about the stock market: I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they’ve performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.

Let me come back to what I said earlier: that there are three things that might allow investors to realize significant profits in the market going forward. The first was that interest rates might fall, and the second was that corporate profits as a percent of GDP might rise dramatically. I get to the third point now: Perhaps you are an optimist who believes that though investors as a whole may slog along, you yourself will be a winner. That thought might be particularly seductive in these early days of the information revolution (which I wholeheartedly believe in). Just pick the obvious winners, your broker will tell you, and ride the wave.

Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others. All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies—themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America—and also an enormous impact, though not the anticipated one, on investors. Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers. You cou...

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

In fact, for all his renown as a stock picker, Buffett has long preferred to have Berkshire grow not by buying stocks that go up, which is what most people would assume, but by adding businesses. Yes, that can add problems too—he’s had some—but he’d still rather head in that direction. The preference is emotional, in that he likes dealing with the managers of Berkshire’s subsidiaries and building a real, working business. And the preference is often economic as well, because of taxes. Imagine that (1) a subsidiary of Berkshire, such as See’s Candies, makes $10 million after-tax, and that (2) Coca-Cola simultaneously makes $125 million after-tax, which would mean Berkshire’s share of that—given that it owns 8% of Coke—would be $10 million. The $10 million earned by See’s is totally Berkshire’s. The Coke $10 million, however, is ensnared: To capture that money Berkshire must pay additional taxes, either on Coke dividends it receives or on capital gains it realizes upon selling Coke shares (it has never sold any). If the opportunities for reinvesting capital within Coke are sufficiently good, which means that the profits “belonging” to Berkshire will grow, Buffett happily accepts the tax toll.

He wants substantial earnings, for sure, but cares not at all whether they are consistent: “I’d rather have a lumpy 15% return on capital,” he has often said, “than a smooth 12%.”

He went into the meeting, Henry says, thinking about plans he had to retire and ready to say “I’m gone” if he got any clue that he couldn’t work with Buffett. Instead, he says, he emerged from the meeting charged up: “I came out totally committed to making this thing work. It’s easy to see what happens with Buffett’s companies. You end up saying you don’t want to let this guy down.”

Furthermore, the managers of many Berkshire subsidiaries work under compensation agreements that encourage them to hold their use of capital to a minimum—and to zip any spare dollars off to Omaha headquarters.

For Berkshire shareholders the fresh ideas that probably matter most are those that come out of the company’s core insurance company, National Indemnity. Over the years the insurer has built a worldwide reputation for its willingness to write a policy covering just about any risk, of almost any size (though the company always caps its exposure), if the premium is satisfactory. Figuring the odds on these policies is a joint project of Buffett and Ajit Jain—both eminently suited to the game—and the two sometimes take Berkshire into weird territory. It would require pages to discuss that terrain fully, but here’s an example: Last year they wrote a policy protecting Grab.com against having to pay a $1 billion prize (with a present value of $170 million), a lure that Grab.com used to attract millions of people to its Internet site, so as to gather information about them that would be useful to marketers. The game for visitors to the site was to pick seven numbers between one and 77; bulletins warned that the odds against anybody’s picking the right seven were formidable. Nobody knew that better than Buffett and Jain, and in fact no one did win. But obviously somebody could have, which would have put a huge hole in Berkshire’s earnings. “I wouldn’t have thrown a party if we had had to pay off,” says Buffett, “but we take well-judged chances like that all the time. That’s what we do that almost no one else is willing to do.”

In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you’re going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.

Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4%—that was its neighborhood in the bad year of 1981, for example—and 6.5. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%.

The colossal miscalculation that investors made in the 1920s has recurred in one form or another several times since. The public’s monumental hangover from its stock binge of the 1920s lasted, as we have seen, through 1948. The country was then intrinsically far more valuable than it had been 20 years before; dividend yields were more than double the yield on bonds; and yet stock prices were at less than half their 1929 peak. The conditions that had produced Smith’s wondrous results had reappeared—in spades. But rather than seeing what was in plain sight in the late 1940s, investors were transfixed by the frightening market of the early 1930s and were avoiding re-exposure to pain.

This is the one thing I can never understand. To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the “Hallelujah Chorus” in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying—except stocks. When stocks go down and you can get more for your money, people don’t like them anymore. That sort of behavior is especially puzzling when engaged in by pension fund managers, who by all rights should have the longest time horizon of any investors. These managers are not going to need the money in their funds tomorrow, not next year, nor even next decade. So they have total freedom to sit back and relax. Since they are not operating with their own funds, moreover, raw greed should not distort their decisions. They should simply think about what makes the most sense. Yet they behave just like rank amateurs (getting paid, though, as if they had special expertise).

Consider the circumstances in 1972, when pension fund managers were still loading up on stocks: The Dow ended the year at 1020, had an average book value of 625, and earned 11% on book. Six years later, the Dow was 20% cheaper, its book value had gained nearly 40%, and it had earned 13% on book. Or as I wrote then, “Stocks were demonstrably cheaper in 1978 when pension fund managers wouldn’t buy them than they were in 1972, when they bought them at record rates.”

At the time of the article, long-term corporate bonds were yielding about 9.5%. So I asked this seemingly obvious question: “Can better results be obtained, over 20 years, from a group of 9.5% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, around book value and likely to earn, in aggregate, about 13% on that book value?” The question answered itself.

By my thinking, it was not hard to say that, over a 20-year period, a 9.5% bond wasn’t going to do as well as this disguised bond called the Dow that you could buy below par—that’s book value—and that was earning 13% on par.

Let me explain what I mean by that term I slipped in there, “disguised bond.” A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months. A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect “coupons.” The set of owners getting them will change as shareholders come and go. But the financial outcome for the business’ owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about. Now, gauging the size of those “coupons” gets very difficult for individual stocks. It’s easier, though, for groups of stocks. Back in 1978, as I mentioned, we had the Dow earning 13% on its average book value of $850. The 13% could only be a benchmark, not a guarantee. Still, if you’d been willing then to invest for a period of time in stocks, you were in effect buying a bond—at prices that in 1979 seldom inched above par—with a principal value of $891 and a quite possible 13% coupon on the principal. How could that not be better than a 9.5% bond? From that starting point, stocks had to outperform bonds over the long term. That, incidentally, has been true during most of my business lifetime. But as Keynes would remind us, the s...

As the table shows, expectations in 1975 were modest: 7% for Exxon, 6% for GE and GM, and under 5% for IBM. The oddity of these assumptions is that investors could then buy long-term government noncallable bonds that paid 8%. In other words, these companies could have loaded up their entire portfolio with 8% no-risk bonds, but they nevertheless used lower assumptions. By 1982, as you can see, they had moved up their assumptions a little bit, most to around 7%. But now you could buy long-term governments at 10.4%. You could in fact have locked in that yield for decades by buying so-called strips that guaranteed you a 10.4% reinvestment rate. In effect, your idiot nephew could have managed the fund and achieved returns far higher than the investment assumptions corporations were using. Why in the world would a company be assuming 7.5% when it could get nearly 10.5% on government bonds? The answer is that rear-view mirror again: Investors who’d been through the collapse of the Nifty Fifty in the early 1970s were still feeling the pain of the period and were out of date in their thinking about returns. They couldn’t make the necessary mental adjustment. Now fast-forward to 2000, when we had long-term governments at 5.4%. And what were the four companies saying in their 2000 annual reports about expectations for their pension funds? They were using assumptions of 9.5% and even 10%.

I’m a sporting type, and I would love to make a large bet with the chief financial officer of any one of those four companies, or with their actuaries or auditors, that over the next 15 years they will not average the rates they’ve postulated. Just look at the math, for one thing. A fund’s portfolio is very likely to be one-third bonds, on which—assuming a conservative mix of issues with an appropriate range of maturities—the fund cannot today expect to earn much more than 5%. It’s simple to see then that the fund will need to average more than 11% on the two-thirds that’s in stocks to earn about 9.5% overall. That’s a pretty heroic assumption, particularly given the substantial investment expenses that a typical fund incurs.

On a macro basis, quantification doesn’t have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country’s business—that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a clear warning signal.

For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire. As you can see, the ratio was recently 133%. Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%. Today stock market “hamburgers,” so to speak, are cheaper. The country’s economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all—that is, unless you’re still deriving your expectations from the 1990s.

“Warren Buffett should say, ‘I’m sorry,’” fumed Harry Newton, publisher of Technology Investor Magazine, in early 2000. “How did he miss the silicon, wireless, DSL, cable, and biotech revolutions?”

“Did it ever bother you,” I ask him, “that people said you were a has-been, that you were through?” “Never,” he says in his folksy, gravelly voice. “Nothing bothers me like that. You can’t do well in investments unless you think independently. And the truth is, you’re neither right nor wrong because people agree with you. You’re right because your facts and your reasoning are right. In the end that’s all that counts. And there wasn’t any question about the facts or reasoning being correct.”

By the mid-1990s, MidAmerican owned regulated utilities in California, Iowa, and Britain. But while Enron and its ilk sported P/Es of 30 to 50, MidAmerican was selling for six to eight times earnings. “We couldn’t figure out what the other companies were doing,” says Sokol. “They kept on building power plants and adding capacity, I guess because they thought demand would go up forever. And their trading businesses were also a mystery. The profits seemed impossible to us.” Meanwhile MidAmerican’s stock was languishing. So Sokol decided in October 1999 to abandon the public markets and sell out to Buffett. Berkshire effectively ended up buying 80% of the company for $35.05 a share, a cost of $3.3 billion. Buffett’s timing wasn’t impeccable, but it was close. By the summer of 2001 the unregulated energy business—headlined by Enron—began its spectacular collapse.

As for some of his other companies, here’s what Buffett says: “GEICO sends me figures every Tuesday—Internet hits, business closed on the Internet, telephone inquiries closed. I love all that. Shaw sends me the daily sales figures by fax. And around Christmas—the month before, I like to get daily sales figures from our jewelry stores and from our candy business.”

Even with the staggering pile of numbers that Buffett sifts through, and even though he works like the dickens, Buffett is no type-A boss. “Yes, I need roller skates to keep up with him,” says Debbie Bosanek, his secretary of nine years, “but I’ve never seen him get mad. I don’t think he’d like to be lied to, though. If you make a mistake and tell him about it, that’s okay, but you wouldn’t want to cover it up.” Adds Tom Murphy, the founder of CapCities: “He wakes up every morning and goes to work to have fun. It’s not work. He’s only with people he likes, so he isn’t stressed out.”

“Most supersmart people tend to make things more complicated,” says Don Graham of the Washington Post Co., where Buffett sits on the board. “He has an extraordinary ability to state things clearly and make them simpler.”

If talking about nuclear destruction on the sixth green at Pebble Beach is incongruous, it doesn’t seem to bother Buffett. A nuclear bomb, he says, “is the ultimate depressing thing. It will happen. It’s inevitable. I don’t see any way that it won’t happen. But we can reduce the probabilities. If there’s a 10% probability of something happening in a given year—and I don’t know if that’s the right probability; nobody knows—then the chances that it will happen in 50 years are 99.5%. If you get it down to 3%, there is about a 78% chance. If you get it down to 1% per year, there’s like a 40% chance, so reducing the probabilities per annum of anything happening obviously increases the chance significantly that your kids will get through their lifetimes without this happening. You can’t get rid of the knowledge. You can try to control the materials. You’ll never get rid of the intent. It is the ultimate problem of mankind.”

In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract—which may require a large payment decades later—you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks—if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pretax returns (which translate to 6% to 7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.