Many of you have asked what I think Warren and Charlie would say about the GameStop (GME) situation. Specifically, what is their opinion on short selling? I did my research and found this video from the 2001 Berkshire Hathaway Annual Shareholder meeting. Timeless investing wisdom, indeed.
đș The video of their response + đ» the full transcript is below.
âShort selling, itâs an interesting item to study because itâs, I mean, itâs ruined a lot of people. It is the sort of thing that you can go broke doing.â
âWarren Buffett
âIt isnât that hard to make money somewhere else with less irritation.â
âCharlie Munger"
Full Transcript
Audience Member Question: Hi, Iâm Dave Staples from Hanover, New Hampshire and Iâve got two questions for you. First, Iâd like to hear your thoughts on selling securities short and what your experience has been recently and over the course of your career. The second question Iâd like to ask is how you go about building a position in a security youâve identified. Using USG as a recent example, I believe you bought most of your shares at between 14 and $15 a share. But certainly, you mustâve thought it was a reasonable investment at 18 or 19. Why was 14 and 15 the magic number? And now that itâs dropped to around 12, do you continue to build your position? How do you decide what your ultimate position is going to be?
Warren Buffett: Well, we canât talk about any specific security, so â our buying techniques depend very much on the kind of security weâre dealing in. Sometimes, itâs a security that might take many, many months to acquire. And other times, you can do it very quickly. And sometimes, it may pay to pay up. And other times, it doesnât.
And the truth is, you never know exactly what the right technique is to use as youâre doing it, but you just use your best judgment based on past purchases. But we canât discuss any specific one.
Short selling, itâs an interesting item to study because itâs, I mean, itâs ruined a lot of people. It is the sort of thing that you can go broke doing.
Bob Wilson, thereâre famous stories about him and Resorts International. He didnât go broke doing it. In fact, heâs done very well subsequently.
But being short something where your loss is unlimited is quite different than being long something that youâve already paid for.
And itâs tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued.
I mean there â itâs the nature of securities markets to occasionally promote various things to the sky, so that securities will frequently sell for five or 10 times what theyâre worth, and they will very, very seldom sell for 20 percent or 10 percent of what theyâre worth.
So, therefore, you see these much greater discrepancies between price and value on the overvaluation side. So you might think itâs easier to make money on short selling. And all I can say is, it hasnât been for me. I donât think itâs been for Charlie.
It is a very, very tough business because of the fact that you face unlimited losses, and because of the fact that people that have overvalued stocks â very overvalued stocks â are frequently on some scale between promoter and crook. And thatâs why they get there.
And they also know how to use that very valuation to bootstrap value into the business, because if you have a stock thatâs selling at 100 thatâs worth 10, obviously itâs to your interest to go out and issue a whole lot of shares. And if you do that, when you get all through, the value can be 50.
In fact, thereâs a lot of chain letter-type stock promotions that are sort of based on the implicit assumption that the management will keep doing that.
And if they do it once and build it to 50 by issuing a lot of shares at 100 when itâs worth 10, now the value is 50 and people say, âWell, these guys are so good at that. Letâs pay 200 for it or 300,â and then they could do it again and so on.
Itâs not usually that â quite that clear in their minds. But thatâs the basic principle underlying a lot of stock promotions. And if you get caught up in one of those that is successful, you know, you can run out of money before the promoter runs out of ideas.
In the end, they almost always work. I mean, I would say that, of the things that we have felt like shorting over the years, the batting average is very high in terms of eventual â that they would work out very well eventually if you held them through.
But it is very painful and itâs â in my experience, it was a whole lot easier to make money on the long side.
I had one situation, actually, an arbitrage situation when I was in â well, it was when I moved to New York in 1954, so it wouldâve been about June or July of 1954 â that involved a surefire- type transaction, an arbitrage transaction that had to work.
But there was a technical wrinkle in it and I was short something. And I felt like a â for a short period of time â I felt like Finova was feeling last fall. I mean, it was very unpleasant.
It â you canât make â in my view, you canât make really big money doing it because you canât expose yourself to the loss that would be there if you did do it on a big scale.
And Charlie, how about you?
Charlie Munger: Well, Ben Franklin said, âIf you want to be miserable, you know, during Easter or something like that,â he says, âborrow a lot of money to be repaid at Lent,â or something to that effect.
And similarly, being short something, which keeps going up because somebody is promoting it in a half-crooked way, and you keep losing, and they call on you for more margin â it just isnât worth it to have that much irritation in your life.
It isnât that hard to make money somewhere else with less irritation.