Henry Blodget
Dec. 4, 2008
Warren Buffett recently wrote an editorial in the New York Times explaining why he was starting to buy stocks. The bottom line?
If you wait for the robins, spring will be over.
But who is Buffett, anyway? How do we know he isn't one of these jokers who is never in doubt and usually wrong?
Fund manager Whitney Tilson of the Tilson Fundsrecently addressed this issue. We've done some cutting and pasting, but mostly we'll let Whitney and Warren take it away:
Whitney Tilson: Starting in 1974, Buffett has written four articles in which he's expressed a strong opinion about the market -- he was bullish in 1974, 1979 and 2008, and was bearish in 1999. I've posted all four articles here [pdf]. Note that he'snever once been wrong -- important to consider when reading his recent NY Times article [in which Buffett announced that he was starting to buy stocks].
We've added some of these article excerpts at the bottom of this post. We've also added a scrollable slide presentation below. To make it easier to read, click the "full screen" button in the bottom right-hand corner of the player (then click "ESC" to return to your screen). If you're only going to read one of the articles, read the third one--the one Buffett wrote for Fortune in 1999. It's the best short synopsis of markets and investing we've ever read. Enjoy!
Excerpt of Forbes article on Buffett, 1974:
What good, though, is a bargain if the market never recognizes it as a bargain? What if the stock market never comes back? Buffett replies: “When I worked for Graham-Newman, I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right--in the short run, it’s a voting machine; in the long run, it’s a weighing machine. Today on Wall Street they say, ‘Yes, it’s cheap, but it’s not going to go up.’ That’s silly. People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business.” Such classic advice is likely to remain sound in the future when they write musical comedies about the go-go boys.
We reminded Buffett of the old play on the Kipling lines: “If you can keep your head when all about you are losing theirs … maybe they know something you don’t.”
Buffett responded that, yes, he was well aware that the world is in a mess. “What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds.” And there is the population explosion, resource scarcity, nuclear proliferation. But, he went on, you can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side.’”
We reminded Buffett of the old play on the Kipling lines: “If you can keep your head when all about you are losing theirs … maybe they know something you don’t.”
Buffett responded that, yes, he was well aware that the world is in a mess. “What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds.” And there is the population explosion, resource scarcity, nuclear proliferation. But, he went on, you can’t invest in the anticipation of calamity; gold coins and art collections can’t protect you against Doomsday. If the world really is burning up, “you might as well be like Nero and say, ‘It’s only burning on the south side.’”
“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices.
Buffett’s final word: “Now is the time to invest and get rich.
Excerpt of Forbes article BY Buffett in 1979:
Excerpt of Fortune article by Buffett in 1999. This is one of the single best short synopses of the stock market and investing we have ever read.
Mr. Buffett on the Stock Market
Fortune, 11/22/99
Fortune, 11/22/99
Investors in stocks these days are expecting far too much, and I’m going to explain why. That will inevitably set me to talking about the general stock market, a subject I’m usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it’s going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it’s correct--will have implications for the long-term results to be realized by American stockholders.
Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.
Now, to get some historical perspective, let’s look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
Let’s start by defining “investing.” The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.
Now, to get some historical perspective, let’s look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.
And here’s a major and very opposite fact: During that same 17 years, the GDP of the U.S.--that is, the business being done in this country--almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.
To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.
To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.
In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.
Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let’s say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.
That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.
Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let’s say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.
That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.
The power of interest rates had the effect of pushing up equities as well, though other things that we will get to pushed additionally. And so here’s what equities did in that same 17 years: If you’d invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you’d have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.
The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you’d bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.
The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.
The chart, as you will see, starts in 1929. I’m quite fond of 1929, since that’s when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who’d been burned. So he just stayed home in the afternoons. And there wasn’t television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I’ve forever had a kind of warm feeling about the Crash...
The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.
The chart, as you will see, starts in 1929. I’m quite fond of 1929, since that’s when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who’d been burned. So he just stayed home in the afternoons. And there wasn’t television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I’ve forever had a kind of warm feeling about the Crash...
Excerpt of Warren's recent New York Times article from October:
Buy American. I Am.
By WARREN E. BUFFETT
Published: October 16, 2008
THE financial world is a mess, both in the United States and abroad. Its problems,
moreover, have been leaking into the general economy, and the leaks are now turning
into a gusher. In the near term, unemployment will rise, business activity will falter and
headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about,
in which I previously owned nothing but United States government bonds. (This
description leaves aside my Berkshire Hathaway holdings, which are all committed to
philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be
100 percent in United States equities.
By WARREN E. BUFFETT
Published: October 16, 2008
THE financial world is a mess, both in the United States and abroad. Its problems,
moreover, have been leaking into the general economy, and the leaks are now turning
into a gusher. In the near term, unemployment will rise, business activity will falter and
headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about,
in which I previously owned nothing but United States government bonds. (This
description leaves aside my Berkshire Hathaway holdings, which are all committed to
philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be
100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when
others are fearful. And most certainly, fear is now widespread, gripping even seasoned
investors. To be sure, investors are right to be wary of highly leveraged entities or
businesses in weak competitive positions. But fears regarding the long-term prosperity of
the nation’s many sound companies make no sense. These businesses will indeed suffer
earnings hiccups, as they always have. But most major companies will be setting new
profit records 5, 10 and 20 years from now.
others are fearful. And most certainly, fear is now widespread, gripping even seasoned
investors. To be sure, investors are right to be wary of highly leveraged entities or
businesses in weak competitive positions. But fears regarding the long-term prosperity of
the nation’s many sound companies make no sense. These businesses will indeed suffer
earnings hiccups, as they always have. But most major companies will be setting new
profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock
market. I haven’t the faintest idea as to whether stocks will be higher or lower a month —
or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you
wait for the robins, spring will be over.
market. I haven’t the faintest idea as to whether stocks will be higher or lower a month —
or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you
wait for the robins, spring will be over.
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