Insights from Buffett's Analysis of 2008 Financial Crisis

SMITH BRAIN TRUST -- Clinical professor of finance David Kass at the University of Maryland’s Robert H. Smith School of Business is a Berkshire Hathaway shareholder and a close follower of Warren Buffett’s investment strategy since 1980. He says the recent release of a 103-page "Financial Crisis Inquiry Commission Interview of Warren Buffett" provides "some very interesting insights into the causes of the financial crisis, its consequences on the shareholders of financial institutions, and on stock market valuation.” Regarding the latter, Kass writes in a recent blog post:

“Mr. Buffett cites a 1924 book by Edgar Lawrence Smith that concluded that stocks always outperform bonds ‘when the dividend yield on stocks was the same as the yield on bonds, and on top of it you had retained earnings.’  If we were to apply this rule of thumb to today’s stock market, the current dividend yield on the S&P 500 of 2.12 percent exceeds the yield on 10-year U.S. Treasury bond (1.72 percent), as of the market close on April 8, 2016.  Furthermore, a better measure, the earnings yield of the S&P 500 (inverse of the P/E ratio) equals 4.43 percent. By these measures, stocks should be expected to outperform bonds, at least in the short or intermediate term.”

Kass says another highlight from the FCIC-Buffett interview that took place in 2010 is Buffett’s take on the “moral hazard” argument by critics of the government bailing out financial institutions:

“When the Federal government stepped in to assist many financial institutions through TARP, etc., the shareholders of these companies lost between 90- and-100-percent of their investment. Bear Stearns stock went from 180 down to 10. This assistance was required to restore confidence in the financial system. Those who criticized the government’s actions on grounds of “moral hazard” were wrong, as the equity of these firms was essentially wiped out.  Unfortunately, wealthy CEO’s were able to walk away while being able to maintain the bulk of their wealth. Mr. Buffett recommends that any company that requires financial aid from the U.S Government should have the wealth of the CEO and his/her spouse wiped out.”

Read Kass’ entire post, "10 Highlights of the FCIC-Buffett interview," here.

Up Close and Personal
Kass and faculty colleague Elinda Kiss will accompany 10 Smith finance undergraduate students to the April 30 Berkshire Hathaway annual shareholder meeting in Omaha, Neb. An attendee since 2006, Kass has led Smith students to the meetings for the past seven years.