Monday, 14 September 2009

Buffett: Keeping abreast of market conditions

Market Call 1: Selling Out Before the Early 1970s bear market

Beginning in 1968: Buffett began to express sincere worries over stock prices. Writing near the peak of the go-go market of the 1960s, Buffett seemed to sense imminent danger to investors.
1969: Unable to find enough quality stocks at reasonable prices, he folded his investment partnership in 1969, acknowledging that his form of diligent, research-intensive stock-picking couldn't compete in a momentum-fed, short-term oriented market. "Spectacular amounts of money are being made by those participating in the chain-letter type stock-promotion vogue," he wrote his clients. "The game is being played by the gullible, the self-hypnotized, and the cynical."

"I believed the odds are good that, when the stock market and business history of this period is being written, this phenomenon regarded as of major importance, and perhaps characterized as a mania." Frustrated by the lack of sensible pricing and the inability of value-oriented managers to make headway amid a sea of momentum value fund managers, Buffett liquidated clients' accounts, put most of his personal wealth into Berkshire Hathaway stock, and stayed mostly out of the money-management business for almost 5 years. He stayed on the sidelines while Americans experienced the most brutal bear market since the crash of 1929 to 1933.
1973 - 1974: The market declined more than 60% during the crash of 1973 to 1974.

Market Call 2: Going Long in 1974

1968: Market peaked.
1973-1974: Five years after the market had peaked, most Americans had turned disillusioned by the stock market. The average portfolio had dropped 40% or more in value. Investors holding the great blue chips of the day - Xerox, Walt Disney, IBM, General Motors, and Sears Roebuck, for example - saw their portfolios decline more than 60% during the crash of 1973 - 1974.
To investors caught in the middle, it seemed like there was no end to the panic selling. Some individuals tried holding their stocks, waiting for a rebound that never took place. Exhausted, they gave in and sold after watching their portfolios lose 50% of their value. The rest took their cues from the market itself. Daily declines reinforced a selling mentality: Selling begat selling, and an orderly market turned into a vicious cylce of losses.
1974: At the bottom, in 1974, few investors could be coaxed to reenter the arena. But Buffett, refreshed from a 5-year hiatus and sitting on plenty of cash, dove headlong into the same stocks the market could no longer tolerate. Like a boy in a candy store, Buffett found more values than he could possibly digest. An investor who plunged into the market at the 1974 low made a 74% return within 2 years.


Buffett has a good understanding of market conditions. He has the ability to value stocks and know when stocks and market are overpriced. His action in completely getting out of the market was interesting. His patience in staying on the sideline was remarkable too. How many could stay in the sideline without reentering at the slightest correction? How remarkable it was too that he chose the depth of the market in 1974 to reenter. Superb ability indeed!

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