Wall Street's encouragement of investors taking speculative and highly risky moves in their investments have made it more of a "gambling parlor," Berkshire Hathaway CEO Warren Buffett said Saturday at their annual shareholder meeting.
Buffett, 91, lambasted Wall Street's investment banks and brokerages and criticized how they generate revenue.
“Wall Street makes money, one way or another, catching the crumbs that fall off the table of capitalism,” he said. “They don’t make money unless people do things, and they get a piece of them. They make a lot more money when people are gambling than when they are investing.”
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A longtime advocate for American companies, Buffett said they have emerged as "poker chips” for speculation in the market. The increasing use of call options has been one reason Wall Street brokers have made more money compared to standard investing.
Berkshire vice chairman Charlie Munger blasted the algorithms that are conducting trades and said brokerage firm Robinhood's ((HOOD)) practices were "disgusting" and was "unraveling" for that purpose. The company's stock has fallen by over 40% in 2022.
Market volatility has been beneficial for Berkshire. Buffett said the conglomerate shelled out $41 billion in stocks during the first quarter and paid for them via their cashflow. Berkshire allocated $7 billion to oil producer Occidental ((OXY)), increasing its stake to over 14%. The conglomerate also added to its Chevron ((CVX)) stake that vaulted the investment into Berkshire’s top four common stock holdings. Chevron is now its fourth top holding.
“That’s why markets do crazy things, and occasionally Berkshire gets a chance to do something,” Buffett said.
“It’s almost a mania of speculation,” Charlie Munger, Berkshire Hathaway vice chairman, added.
Too many retail investors are buying stocks and are not familiar with the financials of the companies, he said. Some of them are receiving advice from brokers who are also not very knowledgeable about those equities.
“We have people who know nothing about stocks being advised by stock brokers who know even less,” Munger said. It’s an incredible, crazy situation. I don’t think any wise country would want this outcome. Why would you want your country’s stock to trade on a casino?”
Buffett has never been a fan of investment bankers and usually does not use them when he purchases companies and deems them to be "money shufflers.”
He bought insurer Alleghany for $848.02 per share for $11.6 billion in March, the largest purchase since 2016. It has been reported that it did not include Goldman’s advisory fee.
Maintaining a large amount of free cashflow has always been a strategy for Berkshire. Buffett reiterated that cash stockpile position and said the conglomerate could perform “better than the banks” at providing credit lines to companies.
Berkshire Focuses on Retail Banks
Buffett sold shares of Wells Fargo ((WFC)), JPMorgan Chase ((JPM)) and Goldman Sachs ((GS)) during the past two years and has instead prioritized ownership of retail banks, keeping his stakes of Bank of America ((BAC)), his second largest position after Apple ((AAPL)) and U.S.Bancorp ((USB)).
This could signal a belief that the U.S. is headed for a longer period of inflation and that retail banks are a safer, more stable investment. The billionaire no longer has exposure to Wall Street banks that generate revenue from global investment banking and trading markets.
The stake of JPMorgan Chase was sold during 2020 after amassing an $8 billion stake.
In 2021, he sold shares of Wells Fargo, a stock he has owned since 1989 and built up to a 10% stake. The consumer fraud committed by Wells Fargo began with employees opening millions of accounts for people without their permission. Wells Fargo also charged mortgage fees that were unnecessary and also made drivers purchase car insurance that was not legally required.
The behemoth also sold off 84% of his stake of Goldman Sachs in 2020 that he acquired after he gave the investment bank a $5 billion emergency loan in September 2008 during the financial crisis.
Berkshire's Class A shares increased by over 7%, beating the benchmark S&P 500 which has sunk by 13.3 % in 2022.
