Warren Buffett explains how speculators could have helped him create more value

Warren Buffett, also known as the Oracle of Omaha, delivered his much-awaited annual letter to the shareholders of Berkshire Hathaway over the weekend.

The annual letter has come to summarise Buffett and his nonagenarian partner Charlie Munger’s philosophy on investment and the world at large. They have become a bible for investment professionals and for investors who are looking to build their own long-term wealth.

In the 2021 annual letter, Buffett curiously pointed out how important a company’s investor base can be to the decisions its management can take. The veteran investor while thankful for the investors who own pieces of his company Berkshire Hathaway highlighted how their investment philosophy has become a constraint for him to generate value for them.

“It should be noted that Berkshire’s buyback opportunities are limited because of its high-class investor base,” Buffett said in the annual letter.

Buffett argued that if shares of Berkshire Hathaway were also owned significantly by short-term speculators, both price volatility and transaction volumes would increase materially. “That kind of reshaping would offer us far greater opportunities for creating value by making repurchases,” Buffett said.

In acknowledging the importance of speculators, Buffett has touched upon an age-old debate in the stock market: do we need short-term investors?

In general, speculators are often frowned upon by long-term investors (traditional buy-and-hold investors) and regulators alike for the volatility they create in the market. That said, in Buffett’s argument lies the true essence of a speculator to the stock market: the creation of liquidity and opportunities for mispricing of a stock’s inherent value and its actual value.

“Speculators play the critical role of bringing changing information into the price. Speculative markets are actually markets for information,” Uma Shashikant, former managing director at CMIE had argued in a column for The Economic Times in 2013.

To be sure, Buffett has denounced purely speculative activity in the market for a long time. In his annual letter in 2000, Buffett defined speculation as "not on what an asset will produce but rather on what the next fellow will pay for it."

“There's a problem, though: They are dancing in a room in which the clocks have no hands," Buffett had said in his 2000 letter.

That said, Buffett does not regret the investors that back his company. “Charlie and I far prefer the owners we have, even though their admirable buy-and-keep attitudes limit the extent to which long-term shareholders can profit from opportunistic repurchases,” he added.