March 31, 2008
Question: What are your thoughts about the Chinese Stock market?
Buffett:
The Chinese stock market? I don’t know what markets are going to do. When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China. Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China. This was really extraordinary. If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.
But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge. The stock market was becoming wildly popular as we know in China. Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion. This made Petro China twice as valuable as the largest company in the world.
I have no idea why and where that many people were relatively new to the market and were very excited about stocks. You do know in the end you have to buy things on a basis of when you get a value for what you pay. This seemed to lose relevance in a market like China. They had a situation like that in Kuwait 20 years ago. When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them. I have no idea whether the people get friendlier or crazier. That is not my game.
My game is simply to buy something worth a dollar for 50 cents. Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I just buy more.
My job is to take advantage of craziness. And that goes back to Ben Graham’s Intelligent Investor chapter 8. If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand. Every day he quotes a price at which he either wants to buy me out or sell me his interest. If he hears a bad rumour he low-balls it, so I buy. Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.
If I’m going to have a partner like that what kind of partner do I want? I want a psycho. The stupider he gets the better I am going to do. I don’t want some cool, calm rational partner. I want somebody with huge ups and downs - a manic depressive. Basically that’s what you get in the stock market some times. As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money. You can’t listen to Mr. Market and think he must be right. Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him. And basically that’s what you get in the stock market.
In China you can’t tell how far the markets will go to extremes. You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year. I do know that in the end stocks tend to sell for what they are worth. At least in the range of what they are worth. They go all over the place in between - but tend to true value in the end.
A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm
http://www.bengrahaminvesting.ca/Resources/Interviews_Notes/Buffett_March_31_2008.pdf
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