Warren Buffett Views on Small and Large Caps and Securitization of Debt

Small and Large Caps

Someone asks Warren Buffett about large and small caps, trying to find out why do large caps outperform over the long term. He says that Berkshire looks at several things and they don’t really care about market cap. It is better to care about understanding the business, to see if that business has good people and if it sells at an attractive price. It doesn't matter how much you are investing. Even if you all know the size of Berkshire, Buffett says that if another business like See's Candy would appear for $25 million, he would buy it. Many large companies are returning 20% on invested capital, but he does not know how long this will continue.

Securitization of Debt

Then he talks about securitization of debt. About real estate and equities, Warren Buffett says that there is a big problem. Corporations get taxed in a business that anyone can run on their own with a single tax. Warren has never been too interested about real estate corporations. The problem is removed by REITs. If someone has only $1000, REITs can be your only alternative, but someone has $1,000,000, it is better owning the real estate on your own. He likes too little in the real estate field.

Real Estate

About real estate valuation, Warren Buffett says that people are looking at real estate in a wrong way and they get confused. He gives as example the Pacific Land Trust in Texas, which owns many acres and is selling them. But you cannot estimate the value of the company by the quantity of land and the price for each acre. It can happen for the company to sell each year only 1% of the total land, so it is nonsense.

This video is Part 9 of 10 videos of this MBA Q&A Lecture with Warren Buffett. Watch Part 10 of Warren Buffett's Lecture.

Warren Buffett Quotes from this Video:

  • If you own the company, you know that you can't sell all the land at once.
  • Some silly valuations exist because people that don't know what it is like to run a real estate company are the ones placing prices on them.
  • We don’t care about large cap, small cap, middle cap, micro cap, it makes no difference. All it matters is understanding the business
Submitted by YouTube Trader on Sun, 04/04/2010 - 14:00

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