Warren Buffett's BIG Warning for Investors (2021)

I would like to, uh, just go over two items that I would like particularly new entrants to the stock market to, uh, ponder just a bit before they try and do 30 or 40 trades a day, uh, in order to profit from what looks like a very, uh, easy game. So, uh, I would like to, uh, go to slide L1, so put that up.

On March 31st, I ran off a list of the 20 largest companies in the world by stock market value. Those names, many of which will be familiar to you, were led by Apple, slightly over 2 trillion, and it went down to the number 20th, which was worth 330 odd billion. But those are the 20 largest companies in the world by market value on March 31st.

What I would like you to do is look at that list. It starts off with Apple, and Saudi Aramco is a pretty kind of a specialized country as a company. It's, I don't know whether it's 95 percent owned by the government or what, but it's essentially a country that's for sale in terms of that business. But the top of the top six companies, five of them are American.

So when you hear people say that America hasn't done it, it's not working very well, or something of the sort, you know, in the whole world, uh, of the six top companies in value, five of them are in the United States. If you think about it, you know, we talked a little about this last year, but in 1790 we had one half of one percent of the world's population and a little less. We had four million people, 3.9 million people; 600,000 were slaves. Ireland had more people than the United States had; Russia had five times as many people as the U.S.; Ukraine had twice as many people as the United States.

So here we were, but what do we have? We had a map for the future, an aspirational map that, uh, somehow now, only 232 years later, leaves us, uh, with five of the top six companies in the world. You know, it's not an accident, and it's not because we were way smarter, way stronger, you know, anything of the sort. We had good soil, a decent climate, but so some of those other countries I named, uh, and, uh, the system has worked unbelievably well.

Just imagine thinking of five of the top six companies in the world ending up with a country that started with a half of one percent of the population, uh, just a few hundred years ago. But what I would like you to do is look at that list for a minute or two, if you want to, and then make an estimate. Make your own guess how many of those companies are going to be on the list 30 years from now. Here they are, these powerhouses, and how many would you guess are going to be on the list?

Well, you know, it's not going to be all 20. It may not even be all 20 today or tomorrow; this was March 31st. But what would you guess? Think about that yourself. Would you put down five? Eight? Well, whatever it would be, I would now invite you to look at slide two, or L2, which goes back a little more than 30 years and look at the top 20 from 1989.

If you look at the top 20 from 1989, there are two things that should grab your interest. None of the 20 from 30 years ago are on the present list—none, zero. There were then six U.S. companies on the list, and their names are familiar to you: General Electric, Exxon, IBM Corp. These are still around; Merck is down there at number one. None made it to the list 30 years later—zero.

I would guess that very few of you, when I asked you to play the quiz a few minutes ago, would have put down zero. And I don't think it will be zero, but it is a reminder of what extraordinary things can happen. Things that seem obvious to you: Japan had this wonderful bull market for a very long time, so you had a number of Japanese companies on the list. Today, there are none. And, uh, the United States has the six; now we have 13, but they aren't the same six.

I would invite you to think about one other thing as you look at this list. 1989 was not the dark ages. I mean, we weren't just discovering capitalism or anything else. People thought they knew a lot about the stock market, and the efficient market theory was in; it was not a backward time.

If you look, the top company at that time had a market value of 100 billion, 104 billion. So the largest company in the world title in just over 30 years has gone from 100 billion to 2 trillion. At the bottom, the number 20 has gone from 34 billion to something a little over 10 times that. Well, that tells you something about what's happened with equality, which is a hot subject in this country.

It tells you a little bit about inflation, but this was not a highly inflationary period as a whole. But it tells you that capitalism has worked incredibly well, especially for the capitalists, and, uh, it's a pretty astounding number. Do you think it could be repeated? Now that, that 30 years from now, you could take 2 trillion for Apple, multiply any company and come up with 30 times that for the leader?

You know, it seems impossible, and maybe it is impossible. But I just—we were just as sure of ourselves as investors, and Wall Street was in 1989, as we are today. But the world can change in very, very dramatic ways.

I'll just give you one other example you might ponder this as we start feeling too sure of ourselves. One thing it shows, incidentally, is that that, uh, it's a great argument for index funds: that the main thing to do is to be aboard the ship. You know, a ship—you know they were all going to a better promised land. You used to know which one was the one they'd necessarily get on, but you couldn't help but do well if you just had a diversified group of equities.

Your equities would be my preference to hold over a 30-year period if you thought you knew a lot about which ones to pick. Or the person that you had hiring you were paying a lot of money to had all these ideas; they could tell you their best ideas.

And 1989 did not necessarily do that well, although overall equities were absolutely the place to be. Secondly, people get enormously attracted to various industries. I mean, they think if you think—if you know—if a company says it's in the XYZ industry and that's a popular one, you can sell IPOs, you can sell SPACs; people disregard sales numbers, earnings numbers—that just, you know, it's the place to be.

So Berkshire Hathaway was the place to be in 1903 when my, uh, my dad was born in 1903, but that wasn't really that big of news. But it wasn't big news that actually Henry Ford was starting the Ford Motor Company. He failed a couple of times before, but he was about to change the world. I mean, the auto—when you think about everything, we've had a great auto insurance company; if there weren't any autos, we wouldn't have Geico.

But it transformed the country, and then Ford brought in the five-dollar daily wage, and that was a huge thing. Assembly lines, everything—autos came along. So let's just assume that you had seen a quick glance back in 1903 of all the interstate highways, 290 million vehicles on the road in the United States; you know everything about it and said, "Well, this is pretty easy, it's going to be cars; it's going to be autos."

First year by accident? Well, we own a company called Marmon. We bought it from the Pritzker family some years ago. The Pritzkers had built this business from many, many, many companies that they'd acquired. The name of their company was Marmon and I don't know exactly why Jay and Bob decided to name it Marmon, but they owned this company Marmon, which in 1911 had been a, uh, the company whose car won the first Indianapolis 500.

Uh, maybe that's why they called it Marmon; they were proud of the fact that the company in 1911 won the first Indianapolis 500. It also was the company that invented the rearview mirror. I'm not sure whether that was a big contribution to society, and certainly around your household you don't want to emphasize too much.

But they, uh, the car that was entered in the Indianapolis 500—the guy who normally sat next to the driver and looked backwards to tell what the competitors were doing—he was sick, so they invented the rearview mirror. So, uh, let's just assume that you decided that autos were this incredible thing and someday there'd be an Indianapolis 500 and somebody would have rearview mirrors on cars, and someday 290 million cars would be buzzing around.

I'd say, so I decided to look at the history and I thought I'd put up the list of auto companies from over the years. I was originally going to put up just the ones that were the M so I could get them on one slide, but when I went to the M's, it went on and on and on, so I just decided to put up the ones that started with M and A.

As you can see, there were almost 40 companies that went into the auto business just starting with M and A, including our little Marmon there in the middle column, which, uh, uh, lasted for a while, quite a while. But it was selling cars in the 1930s; they were really quite special.

But in any event, there were at least 2,000 companies that entered the auto business because it clearly had this incredible future. Of course, you remember that in 2009 there were three left, two of which went bankrupt. So, there is a lot more to picking stocks than figuring out, you know, what's going to be a wonderful industry in the future.

Uh, the Maytag Company put out a car; all say put out a car—who might put out a car? I mean, Nebraska—there was a Nebraska motorcycle. Everybody started car companies, just like everybody's starting something now that can be where you can get money from people. But there were very, very, very few people that picked the winner against—they got the opportunity for, uh, Ford Motor.

And before, he had a few partners, and he really didn't like them, so he figured a way to buy them out. It was sort of the beginning of the, uh, the auto finance; that's a long story but we won't get into that. But, but— you couldn't buy into Ford Motor, and of course General Motors became the dominant company.

Uh, finding one in Rayford did not really make the shift from the Model T to the Model A very well; it did not work very well. So I just want to tell you it's not as easy as it sounds.