Like Lloyd Blankfein and David Einhorn, Warren Buffett was also lured into the interview room last year by the FCIC to help explain why the financial system collapsed.
(Hat tip to Santangel’s Review for transcribing the interview).
Apparently the transcript is “whizzing around e-mail inboxes.”
Not surprisingly, the interview comes to focus on derivatives and speculation, something about which Buff has been outspoken in the past, and which obviously contributed in some way to the market implosion in 2008.
“I don’t think they’re evil per se,” Buffett says, “it’s just, they, I mean there’s nothing wrong with having a futures contract or something of the sort but they do let people engage in massive mischief.”
Then the interviewer asks the Oracle to explain how he sees speculation as opposed to investing.
To which Buff has an interesting answer: “It’s a tricky definition, you know, it’s like pornography.” Then he chuckles.
And he goes on,
You know, it’s like pornography… the famous quote and all that. I look at it in terms of the intent of the person engaging in the transaction.
…An investment operation in my view is one where you look at the asset itself to determine your decision to lay our some money now to get some more money back later on. So you look to the apartment, house, you look to the stock, you look to the fame in terms of what that will produce. And you don’t really care whether there’s a quote under it at all. You are basically committing some funds now to get more funds later on therough the operation of the asset.
Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could be up or it’s going to split or whatever it may be or increase the dividend, but you are not looking to the asset itself.
And I say the real test of how you, what you’re doing is whether you care whether the markets are open. When I buy a stock, I don’t care whether they close the stock market tomorrow or for a couple of years… Now if I care whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to go up tomorrow or now.
And then gambling I would define as engaging in a transaction which doesn’t need to be part of the system…