Warren Buffett says stocks are the place to invest for the long term if interest rates and corporate taxes stay close to current levels.
“If something close to current rates were to prevail in the coming decades and if corporate tax rates also remain close to the low levels currently enjoyed by businesses, it is almost certain that over time, equities will perform much better than long-term fixed rate debt instruments. “wrote Buffett in his annual letter to shareholders of Berkshire Hathaway, which was published Saturday morning.
The letter also indicated greater exposure for two of its potential successors and addressed the company’s inability to find an attractive monster-sized acquisition target, for which the ‘Oracle of Omaha’ was known.
Equities got off to a warm start in 2020, with the S&P 500 and other major US averages reaching record highs. Last year, the S&P 500 surged more than 28% to maintain the longest bull market in U.S. history.
The market was boosted by low interest rates from the Federal Reserve during this bullish wave, which lowered bond yields and made stocks a more attractive investment. The market experienced a further shake in late 2017, when the Trump administration cut the U.S. corporate tax rate from 35% to 21%.
These elements, combined with the “American Tailwind,” will make “stocks the best long-term choice for the individual who does not use borrowed money and who can control his emotions,” said Buffett.
The investment legend, however, offered a great warning to his prediction: “Anything can happen at stock prices tomorrow.” He noted that on occasion, “there will be significant declines in the market, perhaps 50% or even more”.
More visibility for potential successors
In the letter, Berkshire President and CEO said that Berkshire executives, Ajit Jain and Greg Abel, will answer questions at the company’s annual meeting of shareholders in May.
This will be a departure from the traditional format of the meeting, which generally consists mainly of Buffett and Berkshire Vice President Charlie Munger taking questions. Buffett said the change was “very logical.”
However, the change comes in a context of growing frustration at the absence of a more formal announced succession plan. Buffett, 89, has hinted that Jain or Abel could replace him.
Jain and Abel were promoted in 2018. Jain currently leads all insurance-related activities for Berkshire, while Abel manages all non-insurance operations for the conglomerate.
Buffett once again lamented in the letter that Berkshire still has not found an attractive acquisition target to spend the company’s treasury of cash.
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