In this interview with CNBC, Warren Buffett discusses the importance of aligning consumption with income rather than taking excessive risks to increase returns.
He criticizes “reaching for yield,” calling it a dangerous and human tendency, as individuals often seek higher returns despite the risks. Instead, he advises adapting to lower returns by reducing spending, rather than pursuing unrealistic promises of higher yields.
Buffett warns that risk-taking behaviors, particularly in areas like leveraged loans, can lead to significant consequences over time. These behaviors may cause market instability, as seen in historical examples like the tech bubble of the late 1990s, where eventual collapse is inevitable.
Here’s an excerpt from the interview:
Buffett: Well, they shouldn’t be. I mean, the answer, if you need to get 3% and you’re only getting 1%, the answer is to quit giving 3%. It’s not to try and get the one up to three and do more dangerous things.
You should always adapt your consumption to your income. You shouldn’t try and adjust your income to your consumption. That’s a basic principle for individuals, businesses, and everything else.
Reaching for yield is really stupid, but it’s very human. I mean, I understand it. People say, “Well, I saved all this money all my life and I can only get 1% out. What do I do?”
The answer is: you learn to live on 1%, unfortunately. And you don’t go and listen to some salesman come along and tell you, “I’ve got some magic way to get you 5%.”
Host: Do you think though that’s what should be happening? Do you think there is more risk-taking taking place in the insurance market?
Buffett: You see that in what they call leveraged loans and weaker covenants. No, no, people are reaching for yield, there’s no question about that, and that’s stupid. And it has consequences over time. But it’s very human.
Host: Consequences that could have a big market impact?
Buffett: Depends how far it goes. Yeah, yeah. It’s something that—the things that get built in slowly, people going crazy in tech companies in the late 1990s—it can take a lot longer than you think. But eventually, you get to midnight, and everything turns to pumpkins and mice.
You can watch the entire discussion here:
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