Buffett’s Thoughts on Robinhood, Inflation, & His Successor

For over 50 years, Warren Buffett has been at the helm of Berkshire Hathaway. As a wildly successful investor, achieving more than 20% annualized returns for Berkshire Hathaway shareholders, Buffett hasn’t hesitated to share his investment wisdom and advice over the years. As a result, he’s probably one of the most quoted investors of all time.

There are plenty of “Buffett-isms” about value investing, capital preservation, investing for the long-term, and investment mindsets. Probably one of Buffett’s most famous quotes is: “Rule number one is never lose money. Rule number two is never forget rule number one.”

While there’s no denying that the Oracle of Omaha has given sage advice over the years, it’s his recent comments that have captured our attention, and most of Wall Street’s, too.

Berkshire Hathaway held its annual shareholder meeting on May 1, and remarks by Warren Buffett and Charlie Munger created a lot of buzz on Wall Street over the past couple of weeks. The reality is that Buffett and Munger didn’t sugarcoat their thoughts on the Robinhood revolution or rising inflation—and they also slipped in a little hint about who will succeed Buffett.

“It’s [Robinhood] become a very significant part of the casino group that has joined the stock market in the last year or year and a half.” -Buffett

Buffett and Munger expressed their disdain for the Robinhood trading platform that grew in popularity among individual investors amidst the global COVID-19 pandemic. Robinhood added three million users in 2020 alone, ending the year with more than 13 million users. To put that in perspective, that’s up from one million users in 2016.

The no-commission fee, easy-to-use platform lured in many young individuals with no investing experience, all of which hoped to make a quick buck in the stock market. But, as they say, “the house always wins.”

As we discussed in the “Be Wary of No-Fee Brokerage Services” article back in March, Robinhood utilizes a payment-for-order flow strategy to receive a payment for executing trades through a market maker. This has created competition between market makers, and brokerage firms like Robinhood are likely to turn to the market maker with the better payment, rather than the one executing the trade at the best price—which can impact an investor’s gains or losses in a stock.

Inexperience with the stock market can also be detrimental to an amateur investor’s portfolio overall. Buffett warned during the Berkshire Hathaway annual meeting that stock picking isn’t as easy as it appears. He even stated, “I do not think the average person can pick stocks.” In other words, there’s a lot more to investing in stocks than picking up shares of a company in a hot trend right now.

Buffett was concerned that amateur investors were taking on too much risk by trading too many stocks without due diligence. A recent New York Times article revealed that Robinhood users do indeed trade more than other trading platform users—and they’re often trading riskier products like options. In the first three months of 2020, Robinhood users traded 40 times more shares than Charles Schwab’s customers.[1]

As a result, Buffett advised new individual investors to consider investing in index funds for more diversification and holding these investments for 30 years, rather than making 30 to 40 risky trades in a single day on a platform like Robinhood.

“We are seeing very substantial inflation. It’s very interesting. We are raising prices. People are raising prices to us, and it’s being accepted.” -Buffett

Inflation has been top of mind for a lot of economists and Wall Streeters. And based on recent data, there’s cause for concern.

The Consumer Price Index (CPI) soared 4.2% year-over-year in April, exceeding economists’ expectations for a 3.6% rise. From March to April, the CPI increased 0.8%, again much faster than economists’ forecasts for a 0.2% month-to-month rise. Even when you exclude food and energy, the more volatile price groups, core CPI still jumped 3% year-over-year.

One corner of the market that’s seen an exponential rise in prices is the construction industry. Lumber prices have surged 124% this year, and copper is up almost 36%.[2] As you probably know, these prices are soaring amidst the housing boom in the U.S.

Buffett’s Berkshire Hathaway owns Clayton Homes, one of the biggest homebuilders in the U.S., and eight more homebuilders, Benjamin Moore paints and Shaw flooring. So, based on Buffett’s comments, he also sees inflation rear its ugly head in Berkshire Hathaway’s businesses, and he noted that “the costs are just up, up, up.”

And these costs are being passed on to consumers: Housing prices rose by 11.3% year-over-year in March, which is the most significant jump in 15 years. With the Federal Reserve maintaining its near-zero key interest rate policy through 2023, mortgage rates are anticipated to remain low and continue to inspire many Americans to purchase a home. So, inflation, especially when it comes to construction and home building materials, isn’t like to cool off in the near term.

“Greg [Abel] will keep the culture.” - Munger

A little slip of the tongue during the Berkshire Hathaway shareholder meeting by Executive Vice Chairman Charlie Munger led Buffett to confirm that Greg Abel would take over the reins at Berkshire Hathaway when he was ready to step down.

Buffett stated, “The directors are in agreement that if something were to happen to me tonight, it would be Greg who’d take over tomorrow morning.” He also noted that if Abel were unable to take over the role of CEO for Berkshire Hathaway, then Ajit Jain would step in.

Greg Abel is currently the vice president of non-insurance operations at Berkshire Hathaway, a role he has filled since 2018. Ajit Jain is Vice Chairman and currently manages all of the insurance operations at Berkshire Hathaway. Abel is 58, and Jain is 60. Both are much younger than Buffett, who is 90, and Munger, who is 97. And Buffett noted that their age was a factor they considered in choosing his successor.

Now, a succession plan may be in place, but it’s anyone’s guess when Buffett may be ready to hang up his hat. Until then, you can bet that we’ll continue to receive even more sage advice and quote-worthy comments on investing from the Oracle of Omaha.

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[1] https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html

[2] https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html