US economy 'doing great', but Buffett less positive on SPACs, Robinhood

Berkshire Hathaway's elderly duo were critical of trading apps such as Robinhood, with Buffett likening inexperienced day traders to gamblers and saying commission-free brokerages promote a casino-like atmosphere

US economy 'doing great', but Buffet less positive on SPACs, Robinhood
Warren Buffett, seen in a file photo from 2019, said he prefers to study companies for a long time. Image: AFP.

(ATF) Acclaimed American investor Warren Buffett said on Saturday the US economy is faring better than he imagined last year, but the assessments he and colleague Charlie Munger made of SPACs and commission-free brokerages such as Robinhood were less positive.

Speaking at Berkshire Hathaway’s annual meeting, Buffett said the economy has been “resurrected in an extraordinarily effective way” by monetary stimulus from the Federal Reserve and fiscal stimulus from the US Congress.

“It did the job,” Buffett said. “This economy, right now, 85% of it is running in super high gear.”

Gross domestic product grew at an annualized 6.4% rate from January to March, according to a government estimate and some economists project the economy will grow at its fastest clip in nearly four decades this year.

Munger, meanwhile, downplayed concern that Congress and the White House might raise the corporate tax rate to 25% or 28%, saying it wouldn’t be “the end of the world” for Berkshire.

But Buffett, 90, lamented how an influx of Special Purpose Acquisition Companies and inexperienced investors hoping for quick riches have made markets feel like a casino, making it hard for Berkshire to deploy more of its $145.4 billion cash hoard.

He compared the buying frenzy by SPACs – shell companies that raise funds to acquire private companies and take them public, allowing targets to sidestep onerous regulatory checks of an initial public offering – to gambling with other people’s money and said their activity made it tough for his company to compete on deals.

Berkshire Hathaway has $70-80 billion it would “love to put to work,” but has not been able to under the current conditions, chairman and CEO Buffett said.

“It’s a killer. The SPACs generally have to spend their money in two years, as I understand it. If you put a gun to my head and said you have to buy a big business in two years, I’d buy one, but it wouldn’t be much of one. We look and look,” he said.

More than $100 billion has been raised by SPACs or blank-check companies in the US so far this year, while the value of SPAC mergers and acquisitions hit a record $263 billion, according to data from Dealogic.

“It’s a different equation that you have if you’re working with other people’s money where you get the upside, and you have to give it back to them if you don’t do something, and frankly, we are not competitive with that,” he said.

There are companies that are interested in being acquired by Berkshire, but it would be difficult for them to do so because a SPAC bidder would counter with a higher offer, Buffett said.

“That won’t go on forever, but it’s where the money is now,” he said.

The annual meeting was held in Los Angeles, where Buffett joined 97-year-old vice-chairman Charlie Munger, to answer more than three hours of shareholder questions.

'The gambling impulse'

Berkshire’s leaders also heaped criticism on trading apps such as Robinhood, with Buffett likening the millions of inexperienced day traders who entered the stock market in the past year to gamblers. He said commission-free brokerages such as Robinhood Financial promoted a casino-like atmosphere and that Robinhood has attracted – "maybe set out to attract" – a large number of people who are just gambling on short-term price movements in stocks such as Apple.

"There is nothing illegal to it, there's nothing immoral, but I don't think you build a society around people doing it," he said.

Buffett said that while the odds of profiting from day trading stocks and derivatives are better than playing the state lottery, many new investors would have better results buying and holding shares of good companies.

"The gambling impulse is very strong in people worldwide and occasionally it gets an enormous shove," Buffett said. "It creates its own reality for a while, and nobody tells you when the clock is going to strike 12 and it all turns to pumpkins and mice," he said.

Some critics have said free trading platforms encourage millennials to view trading as a game or amusement. And Buffett's long-time business partner, Charlie Munger, was more harsh. 

He said it was “just god-awful that something like that would draw investment from civilized man and decent citizens. It’s deeply wrong. We don't want to make our money selling things that are bad for people.”

Brokers like Robinhood Financial have attracted controversy as traders drove huge rallies this year in shares of video game retailer GameStop, movie theater chain AMC Entertainment Holdings and other companies despite no fundamental reason for the frenzy.

Some of the buying was fueled by chats on forums like Reddit's WallStreetBets to ostensibly to punish hedge funds that had bet against so-called meme stocks.

Robinhood faces many lawsuits over its decision in January to curb trading in GameStop and other stocks, and Massachusetts is seeking to revoke its broker-dealer license.

Greater discontent?

Many of Berkshire’s dozens of operating units have been rebounding as anxiety over Covid-19 lessens, more people get vaccinated, stimulus checks are spent, business restrictions are eased and confidence about the economy grows.

Shareholders rejected proposals requiring Berkshire to disclose more about its efforts to address climate change and promote diversity and inclusion in its workforce.

But both proposals received about one-quarter of the votes cast, suggesting greater discontent than Berkshire shareholders historically demonstrate. Buffett, who controls nearly one-third of Berkshire’s voting power, opposed both proposals.

Saturday’s meeting came after Berkshire said first-quarter operating profit rose 20% to about $7 billion, while net income including investments totaled $11.7 billion.

But there were signs Berkshire has grown more cautious about the markets. While Berkshire repurchased $6.6 billion of its own stock from January and March, the pace of buybacks slowed.

Berkshire also said it sold $3.9 billion more stocks than it bought, though it still owned $151 billion of stock in just two companies, Apple and Bank of America.

With reporting by John McCrank and Jonathan Stempel at Reuters

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US economy SPACs Robinhood Warren Buffett Charlie Munger Berkshire Hathaway AGM