Warren Buffett is the quintessential bottom-up stock picker -- buying good quality companies and not worrying if, in his own words, "the market were to shut down for the next 10 years".
But given the extraordinary macro developments that have taken place over the past few years, such as the crude collapse and the emergence of negative interest rates in many developed economies, there were plenty of macro subjects discussed at Berkshire Hathaway's annual shareholder meeting.
Value investor and long-time Buffett watcher Raamdeo Agrawal who is just back from Omaha paying obeisance to the legend, says the Oracle had a unique take on the subject of negative rates.
"He said that if markets price in negative or zero interest rates for the long term, risk assets will be priced much more higher," Agrawal, Joint MD at brokerage firm Motilal Oswal, told CNBC-TV18 in an interview.
Buffett's comments on zero rates, arguably hypothetical, do not tie in with his USD 60-70 billion cash position at Berkshire, which has been reeling under the policy.
But Buffett is not one who gets bogged down by what's happening around in the world, says Agrawal.
"He will play micro and will continue to buy stocks if they are trading below their intrinsic values."Below is the verbatim transcript of Raamdeo Agrawal’s interview with CNBC-TV18's Latha Venkatesh, Sonia Shenoy and Anuj Singhal.Sonia: So, as an investor and a keen market watcher what was the biggest takeaway for you from that speech?A: I was looking at the notes we took there. One of the things, which I was looking forward to was what is going to be the impact of negative interest rates. It is one one of the biggest phenomena today, along with whatever we saw happen to oil. Both Buffett and [partner] Charlie Munger addressed that, saying it is the first time it has ever happened, nobody has any history to go, and said that if you are not not thoroughly confused about how to look at it, you are not thinking enough about it. So what he is saying is that right now worldwide, you have valuations of 18 price-to-earnings -- it is with the belief that long-term interest rates are going to be at 4-5 percent. If rates are going to be 1 or 2 percent permanently -- if central banks say this is a new normal -- you will see the asset prices going through the roof. Buffett says that today one of the problems in US is that all assets are bid very high. Cap rates in real estate are going up because you can actually borrow at negative or 1 percent or whatever. At 1-1.5-2 percent, if you can get 8-10 percent yield, investors will go for arbitrage.Buffett has committed some USD 15-20 billion to a solar energy project that has internal rate of return including the tax benefit of about 10-11 percent. With his AAA position, he can borrow at 1-1.5 percent or 2 percent globally. So, why would he not take that arbitrage of 7-8 percent, completely locked in. Banks are willing to give him long-term money for that kind of interest rate. So this negative interest rate, how it will play out is going to have a huge impact on financial products and valuations going forward. But nobody knows, if it becomes a five-year or seven-year continuing phenomenon. That is one thing.Anuj: Did it create a bubble, is that something that you draw?A: He is saying that right now, it is not of bubble proportion. But it will create a bubble. The stage is set for some kind of bubble in some asset class. Risk asset class are only two: equity and real estate. Last time, we had massive irrational valuation of real estate [in 2007]. My sense is the next round is going to be equity.Sonia: So, how will you deal with it in your own strategy in many of your funds etc? As a retail investor who is watching right now how should we deal with negative interest?Latha: Is it really our problem?A: It is a global problem and it is just something to be observed. Oil price coming down is a huge macro factor, it is very important but not knowable. So, just leave it to itself. It is at least positive for the equities.Latha: Did he worry about the fact that central bankers are running out of tools. Negative interest rate, where else can you go, did that apocalypse feeling worry him?A: They (Buffett and Munger) hate to discuss anything macro. This was the most they could go. They clearly said they believe only in micro discussions related to businesses and companies and not so much about macro. They have no clue and no interest in macro developments. He says that anytime, I am willing to buy businesses at a reasonable price.Anuj: One of the most interesting things Buffett said is one of the keys of successful investing is avoiding envy. In your own context how would you put it?A: It is simple. You are making 40 percent or you have doubled your money while I have done only 30 percent. So, I should be happy with my 30 percent. I should not bother about your 100 percent. I should congratulate you that you made 100 percent and try to see how I can learn one or two tricks from you so that my performance can improve.On next page: Raamdeo Agrawal on what the FII mood is about India_PAGEBREAK_Sonia: We did speak to you earlier about what the foreign institutional investors (FII) mood on India is and you did tell us how positive it is but was it very different from the last time you went to the meeting (AGM)?A: Yes, this time India has arrived. Everybody is watching it. I was thinking that again foreign investors would ask ask me about the government's performance and why India is not growing, what will it take to grow. But it was not like that.Of course, they are also waiting for the growth to resume. They are also watching the data: monsoon etc. But clearly one thing is that the US market is at an all time high. Their biggest portfolio has done superbly well and the kind of prosperity you can clearly feel in America, particularly in financial markets -- and the mandates are very big. Millions look to be really small, you have got to talk minimum denominator of billions.Sonia: So, between last time and now, why do they like India much more?A: I do not know. I must have met 17-18 investors between Washington, New York, Kansas City. They do not know how to play it. The beauty is that they do not have people on the ground and they have not made much money in India. But for their emerging markets allocation, they are clearly looking at India to be the foremost country. We need to play our cards well and we are entitled to get good flows in the days to come. I saw one of the funds, he was saying that he was going to get a mandate for USD 2 billion. They have got the mandate for USD 2 billion, it is going to flow, 30 percent will come to India.Latha: You spoke about negative interest rates. Any other big point of conversation or lesson from Buffett?A: An inteesting observation was on the impact of Internet. They said it is going to be huge. Right now, people are buying financial products and mostly intimidated and it is a push product so people are paying a lot of money for the push. And now, it is becoming a pull, people are empowered more and more so and they would not like to pay for it. And hence, it is going to have a huge impact on how the financials of even insurance companies will emerge. For the first time, he refused to talk about the strategy of [Berkshire's insurance subsidiary] GEICO. He also did not discuss his logic of buying IBM. He brushed his head, probably said it was a mistake or that they might be trying to do something or they might be selling also. On insurance, I came to know only in the annual general meeting (AGM) that Swiss Re and Munich Re, these two are the huge global reinsurance companies, both of them, Buffett has sold out. So, he said the prospects for this industry is very – he does not think it is good longer term.But, he is the 100 percent owner of one of the world’s largest reinsurance companies: Gen Re. So, when you have 100 percent, you get stuck with even if the prospect is weak. So I could see that while he can sell his minority stakes in reinsurance companies, but you can't sell 100 percent stake because you are married to it.Sonia: Any other interesting sectors, some sunrise sectors that he spoke about or referred to?A: The way he manages smaller stocks is by giving USD 9 billion each to two managers. So, they are doing whatever they have to and Buffett does not want to discuss anything about what those two are doing. What Buffett is busy with is that he does not want to do anything small. He wants to do USD 25-40 billion [in a] single deal. One of the pain points was zero interest rate. He has USD 88-90 billion of float, which is actually cash in hand. USD 60-65 billion cash and rest in notes etc. That is hurting Buffett big time because it is barely yielding anything.Latha: Negative interest rates is hurting big time. A: You realise [the impact of negative rates only in US etc] because we are still in 10 percent situation. So India is like a sunny country while European and American continents are dark. It will have a huge impact for India because they cannot go beyond zero, they cannot go meaningfully lower. But from our 9-12 percent, we can definitely go to 3-5 percent. When you go down another 2-3 percent point, you know what it can do to the demand situation.We have a lot of routes for money to flow here: – foreign direct investors (FDI), foreign institutional investors (FII), bonds. So, we can see some serious flow if we conduct ourselves well. If the monsoon is good, that itself will get a big salami from there.Anuj: The one big call of Buffett has always been that to own businesses that you are comfortable, not just own shares. What businesses right now do you think you will comfortable owning in India?A: Our portfolios are open. We are buying minority interests -- 1,00,000 shares 2,00,000 shares etc. Buffett, as he puts it, owns 9.5 companies from the S&P 500. So it is still 490 companies to go. We are not in there.Latha: Okay, but how many Berkshire Hathaway shares do you have and have you made money on them?A: We did make money. Last year, I held 5 percent of our portfolio -- about USD 6 million -- in Berkshire Hathaway shares. Last year, when I went there, I saw they do not have an investor relations (IR) department. Would you believe it? So, I met one of the largest investors and we concluded that it cannot grow at more than 9-10 percent or 11 percent. I said that does not fit into my own return requirement. I have promised 15 percent to investors and aim for 25 percent. So, we sold out everything.Anuj: How much do you have right now?A: Zero.Anuj: I thought you get invited only if you are a shareholder.A: No, you can go [without being a shareholder].Anuj: What about the monsoon theme here? Do you think it could be a powerful trigger for the markets to go back to previous highs? It has been a stock specific market.A: I am very bad at guessing what will happen in the short term but it will be a huge positive. If you get what the IMD has predicted, there is no reason for us to [not rally]. Latha: You saw the auto sales numbers, that is one of your favourite set of stocks. So, are you getting a sense that this is going to build on?A: I am really surprised. When I saw the numbers last evening, I said, now things are finally turning. And a lot of these two-wheelers have rural fundamentals in it. We do not know what is driving this because rural has had low crop yield and lower prices and probably the only thing which is going in their favour is lower inflation. That is probably their purchasing power.On next page: Raamdeo Agrawal on stocks and sectors he is watching closely._PAGEBREAK_Sonia: M&M just told us that it is also the hope of a better monsoon because of which other people are buying.A: But hope doesn't put purchasing power in your pocket.Anuj: The consumption numbers have been good, right?A: Yes, it is surprising.Sonia: This time the earnings season at least for your portfolio has been much better than expected? So, all the companies that you have in your funds, whether it is Infosys, IndusInd Bank, Maruti Suzuki, all reporting good numbers. Do you think we are at the cusp of a revival in the earnings season and what kind of earnings growth are you expecting?A: As far as my portfolio is concerned, it is supposed to have good numbers. Otherwise why are people paying to have a manager? So, this is not a set of companies, which will give you a representation of the market. It is significantly higher in terms of earnings growth. But even otherwise, my sense is that we might see high single digit aggregate earnings growth. Because some of the bad ones, you are yet to see. The bad ones will come in second half.Sonia: High single digit in FY17, by the end of FY17?A: No, right now, March.Latha: You mean Q4 numbers?A: I am talking about Q4. Next year is still in the air. Lots of things can change. Monsoon is going to be a huge leveller. Monsoon will reduce stress on the farm side will reduce food price pressure on the CPI side.Anuj: Can the market get rerated because of all the positive factors? Last year was a tough one for us, especially the last three months and the Indian market got dated by a couple of notches. Do you think we can go back to slightly higher than the average PE multiples for Indian market if all these things look up?A: Typically, the market will move with a higher PE multiple in the anticipation of higher growth. But growth comes only after four quarters. So, clearly the first move is to go from 20 PE to 25 PE and then earnings to come back with 25 percent earnings growth which will bring down the PE multiple again back to 20. So, I will think that markets are most likely going to move ahead of earnings and people are waiting for earnings to come.Latha: Buffett won't reveal what his two fund managers are going to do with his next set of stocks they will watch, but can you tell us what is the next set of stocks you are watching, what will be your next focus in your Focus 25 if you want to add and make it 35 what would be those next 10 stocks?A: Actually we don't get too many stocks every now and then.Latha: Okay, next five?A: Indigo results have come. They were wonderful. Now, if I am at 7 percent, I will take it to 9 percent. In fact, buying a completely new stock is lot of effort because I have to throw out one and get another one.Latha: I am just wondering where are your eyes set? Is it on consumption?A: The auto numbers are continuously rising for more than 2-3 months. Maybe we may look at something out there. I do not have any names to mention and in any case, if it is there, this is the last place to tell you.Anuj: I thought I should ask you about your private equity investments. You exited in Power Mech initial public offering (IPO), in Parag Foods I believe you have exited. Right now it is on. Anything interesting where you might be investing now in this space?A: This is a fund one, which is getting exited. So, all the 7-8 companies will go through this process this year and by December, we will have another two three IPOs and some secondary exits. Meanwhile, the same 3-4 will be invested in from the second fund. So, those routines are on.Anuj: How big is your investments in this route now?A: The first fund was USD 125 million. We are expected to return about 3x of this. And the second fund is about USD 175 million. Of that about USD 110-120 million is already done. So, last 3-4 proposals are to happen in the next nine months.Sonia: Whenever Warren Buffett is asked how he manages stress, he says that you should have work-life balance. What about you? How do you manage stress?A: My work does not have stress at all. In fact, it is fun. So, working for eight to 10 hours, what the outside world calls work, is the biggest fun for me.Latha: There is a saying that if you love your work, then you are on a holiday every day. A: If I am lucky about something, it is about what I do.
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