I'm surprised to learn that the Palestinians now have some rockets with a 50 kilometre range. Israel is 300 km long and 100 km wide. Apparently some 600,000 Israelis are now within rocket range.
I wouldnt be surprised at all if this involves some exaggeration by the Israelis to provide some excuse for their actions. But I've followed this conflict for the last 15 years or so and this is the strongest I've ever known the Palestinians to be. The rockets will cause few Israeli casualties; but the psychological effect would be far larger.
There are also reports that Hamas has built a Vietcong style tunnel network under Gaza and are itching for an urban battle.
Maybe the Israeli juggernaut will be beaten after all.
Update: Interesting essay here about how Israelis feel very threatened by Hamas, Hezbollah, Iran, and most of all Israeli Arabs, who may form the majority of Israelis by 2040.
Wednesday, December 31, 2008
Tuesday, December 30, 2008
The housing bubble was obvious 3 years ago
I clearly remember reading this article from The Economist 3 years ago, which pronounced that the housing boom was "the biggest bubble in history". I wonder if I could have done more to take advantage of it- like short american banking stocks.
I suppose there'll be other opportunities.
I suppose there'll be other opportunities.
Morality has no place in economics
There is an ongoing trend, among financial experts and lay people alike, to explain away the financial crisis by saying that the hardship is "deserved", e.g. the american public was too spendthrift and now they're paying for their sins.
This sort of moralising can sway the mind towards certain ideas relating to economic policy e.g. since the recession is deserved we might as well egg it on by increasing interest rates or reducing government spending.
At the end of the day, moralising has no place in economics. So says this writer in espousing Keynesian economic intervention:
"Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge."
As with much of life, macroeconomics doesn't always work the way it should. And so I'm a qualified supporter of measured government intervention to face this crisis.
This sort of moralising can sway the mind towards certain ideas relating to economic policy e.g. since the recession is deserved we might as well egg it on by increasing interest rates or reducing government spending.
At the end of the day, moralising has no place in economics. So says this writer in espousing Keynesian economic intervention:
"Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge."
As with much of life, macroeconomics doesn't always work the way it should. And so I'm a qualified supporter of measured government intervention to face this crisis.
Monday, December 29, 2008
Stock List
Its time to walk the talk. Or at least talk in more detail.
Below are two tables: one contains stocks that I believe are cheap. The other shows the expensive ones. No prizes for guessing which's which.
Below are two tables: one contains stocks that I believe are cheap. The other shows the expensive ones. No prizes for guessing which's which.
Good Times
With all the gloom and doom going on, one can lose sight of the fact that these are good times: for long term investors, that is.
I am quite excited about the discounted prices of stocks right now. Wait, let me qualify that- I dont feel that stocks in general are particularly cheap. They're cheap if you compare them with the prices of the last 10-15 years, but they're actually priced just about average if you compare with the 70s and 80s.
What really gets my heart racing are the prices of small cap stocks, particularly those with strong businesses. Some are very cheap. At some point I'll point out my picks and we'll see how well they'll do over the next couple of years.
I am quite excited about the discounted prices of stocks right now. Wait, let me qualify that- I dont feel that stocks in general are particularly cheap. They're cheap if you compare them with the prices of the last 10-15 years, but they're actually priced just about average if you compare with the 70s and 80s.
What really gets my heart racing are the prices of small cap stocks, particularly those with strong businesses. Some are very cheap. At some point I'll point out my picks and we'll see how well they'll do over the next couple of years.
United States House Price to Rent Ratio
Above is a chart of the US' house price to rent ratio for the last 23 years. Taken in isolation, this chart shows that a very obvious bubble grew from about 1999 onwards.On a more personal level, I'm wondering whether a similar bubble exists in the KL high end property market. For example, the house price to rent ratio for landed Bangsar properties is in the region of 2.5 to 3 times, which is far more expensive than the US bubble.
I feel that Malaysians in general should strongly consider renting instead of buying a house.
Sunday, December 28, 2008
I try to know what I'm doing
I think it is one of the great blessings of my budding investment career that so early into it, I have been witness to some of the seminal events of global economic and market history. My first year was spent watching the KLCI rocket from something like 1,000 points to 1,450 points, amidst the greatest commodities boom of the last 30 years. And in my second year I watched what was probably the fastest commodities crash since the great depression, the worst global credit crunch since the great depression, a 40% fall in the KLCI and the S&P 500, ongoing devaluations of western currencies and failures of iconic western investment banks like Lehman Brothers and Bear Sterns.
I think one of the things that I think I've learnt from this experience is that as an investor, one should buy into an investment only when one really knows what one is buying into. In other words, Buy What You Understand. And buy for the right reasons. Buy into a business because you believe its undervalued, not because you believe its stock is going to go up. Because a stock could very well go down. If the stock has good value, however, given some time its price will recover.
To put it in another way, whenever I invest into something these days, I pretend like the stock market doesn't exist. When I look at stocks, I pretend that i'm being offered a small stake in a private company. Hence, I pretend that it would not be easy to sell my stock, which makes me choose more carefully.
I think one of the things that I think I've learnt from this experience is that as an investor, one should buy into an investment only when one really knows what one is buying into. In other words, Buy What You Understand. And buy for the right reasons. Buy into a business because you believe its undervalued, not because you believe its stock is going to go up. Because a stock could very well go down. If the stock has good value, however, given some time its price will recover.
To put it in another way, whenever I invest into something these days, I pretend like the stock market doesn't exist. When I look at stocks, I pretend that i'm being offered a small stake in a private company. Hence, I pretend that it would not be easy to sell my stock, which makes me choose more carefully.
A Pound Crisis?
A couple of days ago I was shocked to discover that the RM/ Sterling exchange rate is now RM 5.13 from RM 7 about a year ago. That's a fall of about 30% for the Pound. I havent a clue on whether it will recover from here or simply keep on getting lower. Currencies are really not my field of expertise (to put it mildly). The only thing that sticks out in my mind is that The Economist's Big Mac Index (yes, funny huh) has long suggested that the pound was one of the world's most overvalued currencies. I have no confidence in the reliability of burger prices to forecast currency movements, but I suppose recent events have shown that the Big Mac Index may have something going for it after all.
The ongoing currency and budget catastrophe engulfing Iceland really astounds me. The Wall Street Journal has an interesting video about it at http://online.wsj.com/video/how-iceland-collapsed/F7F0A5B0-EF8C-425C-96D0-6579D5955AFD.html . Getting back to the subject at hand, here's an essay on how the UK has a small possibility of undergoing a similar disaster: http://blogs.ft.com/maverecon/2008/11/how-likely-is-a-sterling-crisis-or-is-london-really-reykjavik-on-thames/#more-359. Basically the writer feels that Britain is also highly leveraged (albeit not as badly as Iceland) and could also suffer a similar currency and financial crisis.
I will be honest enough to say that I am not educated enough on the subject to make any of my own pronouncements on the matter.
The ongoing currency and budget catastrophe engulfing Iceland really astounds me. The Wall Street Journal has an interesting video about it at http://online.wsj.com/video/how-iceland-collapsed/F7F0A5B0-EF8C-425C-96D0-6579D5955AFD.html . Getting back to the subject at hand, here's an essay on how the UK has a small possibility of undergoing a similar disaster: http://blogs.ft.com/maverecon/2008/11/how-likely-is-a-sterling-crisis-or-is-london-really-reykjavik-on-thames/#more-359. Basically the writer feels that Britain is also highly leveraged (albeit not as badly as Iceland) and could also suffer a similar currency and financial crisis.
I will be honest enough to say that I am not educated enough on the subject to make any of my own pronouncements on the matter.
Monday, October 13, 2008
2001 Warren Buffett Speech on Extended Bear Markets
WARREN BUFFETT ON THE STOCK MARKET (Abridged, For Educational Use Only. This is a classic illustration on the stock market trends of the future by Warren Buffett)
FORTUNEThursday, December 6, 2001 By Carol Loomis
From Fortune Magazine:
"Two years ago, following a July 1999 speech by Warren Buffett, chairman of Berkshire Hathaway, on the stock market--a rare subject for him to discuss publicly--FORTUNE ran what he had to say under the title Mr. Buffett on the Stock Market (Nov. 22, 1999). His main points then concerned two consecutive and amazing periods that American investors had experienced, and his belief that returns from stocks were due to fall dramatically. Since the Dow Jones Industrial Average was 11194 when he gave his speech and recently was about 9900, no one yet has the goods to argue with him.
So where do we stand now--with the stock market seeming to reflect a dismal profit outlook, an unfamiliar war, and rattled consumer confidence? Who better to supply perspective on that question than Buffett?
The thoughts that follow come from a second Buffett speech, given last July at the site of the first talk, Allen & Co.'s annual Sun Valley bash for corporate executives. There, the renowned stockpicker returned to the themes he'd discussed before, bringing new data and insights to the subject. Working with FORTUNE's Carol Loomis, Buffett distilled that speech into this essay, a fitting opening for this year's Investor's Guide. Here again is Mr. Buffett on the Stock Market. "
Warren Buffett:
The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent.
Dow Jones Industrial AverageDec. 31, 1964: 874.12Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that).
Dow IndustrialsDec. 31, 1981: 875.00Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period.
Gain in Gross National Product1964-1981: 373%1981-1998: 177%
So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.
Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half.
Interest Rates, Long-Term Government BondsDec. 31, 1964: 4.20%Dec. 31, 1981: 13.65%Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.
The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!
And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen. Later, we'll look at the pathology of this dangerous and oft-recurring malady.
Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4%--that was its neighborhood in the bad year of 1981, for example--and 6.5%. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%.
So there you have my explanation of those two wildly different 17-year periods. The question is, How much do those periods of the past for the market say about its future?
To suggest an answer, I'd like to look back over the 20th century. As you know, this was really the American century. We had the advent of autos, we had aircraft, we had radio, TV, and computers. It was an incredible period. Indeed, the per capita growth in U.S. output, measured in real dollars (that is, with no impact from inflation), was a breathtaking 702%.
The century included some very tough years, of course--like the Depression years of 1929 to 1933. But a decade-by-decade look at per capita GNP shows something remarkable: As a nation, we made relatively consistent progress throughout the century. So you might think that the economic value of the U.S.--at least as measured by its securities markets--would have grown at a reasonably consistent pace as well.
The U.S. Never Stopped Growing
Per capita GNP gains crept in the 20th century's early years. But if you think of the U.S. as a stock, it was overall one helluva mover.
Year
20th-Century growth in per capita GNP(constant dollars)
1900-10
29%
1910-20
1%
1920-30
13%
1930-40
21%
1940-50
50%
1950-60
18%
1960-70
33%
1970-80
24%
1980-90
24%
1990-2000
24%
That's not what happened. We know from our earlier examination of the 1964-98 period that parallelism broke down completely in that era. But the whole century makes this point as well. At its beginning, for example, between 1900 and 1920, the country was chugging ahead, explosively expanding its use of electricity, autos, and the telephone. Yet the market barely moved, recording a 0.4% annual increase that was roughly analogous to the slim pickings between 1964 and 1981.
Dow IndustrialsDec. 31, 1899: 66.08Dec. 31, 1920: 71.95
In the next period, we had the market boom of the '20s, when the Dow jumped 430% to 381 in September 1929. Then we go 19 years--19 years--and there is the Dow at 177, half the level where it began. That's true even though the 1940s displayed by far the largest gain in per capita GDP (50%) of any 20th-century decade. Following that came a 17-year period when stocks finally took off--making a great five-to-one gain. And then the two periods discussed at the start: stagnation until 1981, and the roaring boom that wrapped up this amazing century.
To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.
How could this have happened? In a flourishing country in which people are focused on making money, how could you have had three extended and anguishing periods of stagnation that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make--that psychological force I mentioned above: People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.
The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium?
And then came along a 1924 book--slim and initially unheralded, but destined to move markets as never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis.
But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."
Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.
FORTUNEThursday, December 6, 2001 By Carol Loomis
From Fortune Magazine:
"Two years ago, following a July 1999 speech by Warren Buffett, chairman of Berkshire Hathaway, on the stock market--a rare subject for him to discuss publicly--FORTUNE ran what he had to say under the title Mr. Buffett on the Stock Market (Nov. 22, 1999). His main points then concerned two consecutive and amazing periods that American investors had experienced, and his belief that returns from stocks were due to fall dramatically. Since the Dow Jones Industrial Average was 11194 when he gave his speech and recently was about 9900, no one yet has the goods to argue with him.
So where do we stand now--with the stock market seeming to reflect a dismal profit outlook, an unfamiliar war, and rattled consumer confidence? Who better to supply perspective on that question than Buffett?
The thoughts that follow come from a second Buffett speech, given last July at the site of the first talk, Allen & Co.'s annual Sun Valley bash for corporate executives. There, the renowned stockpicker returned to the themes he'd discussed before, bringing new data and insights to the subject. Working with FORTUNE's Carol Loomis, Buffett distilled that speech into this essay, a fitting opening for this year's Investor's Guide. Here again is Mr. Buffett on the Stock Market. "
Warren Buffett:
The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent.
Dow Jones Industrial AverageDec. 31, 1964: 874.12Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that).
Dow IndustrialsDec. 31, 1981: 875.00Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period.
Gain in Gross National Product1964-1981: 373%1981-1998: 177%
So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.
Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half.
Interest Rates, Long-Term Government BondsDec. 31, 1964: 4.20%Dec. 31, 1981: 13.65%Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.
The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!
And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen. Later, we'll look at the pathology of this dangerous and oft-recurring malady.
Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4%--that was its neighborhood in the bad year of 1981, for example--and 6.5%. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%.
So there you have my explanation of those two wildly different 17-year periods. The question is, How much do those periods of the past for the market say about its future?
To suggest an answer, I'd like to look back over the 20th century. As you know, this was really the American century. We had the advent of autos, we had aircraft, we had radio, TV, and computers. It was an incredible period. Indeed, the per capita growth in U.S. output, measured in real dollars (that is, with no impact from inflation), was a breathtaking 702%.
The century included some very tough years, of course--like the Depression years of 1929 to 1933. But a decade-by-decade look at per capita GNP shows something remarkable: As a nation, we made relatively consistent progress throughout the century. So you might think that the economic value of the U.S.--at least as measured by its securities markets--would have grown at a reasonably consistent pace as well.
The U.S. Never Stopped Growing
Per capita GNP gains crept in the 20th century's early years. But if you think of the U.S. as a stock, it was overall one helluva mover.
Year
20th-Century growth in per capita GNP(constant dollars)
1900-10
29%
1910-20
1%
1920-30
13%
1930-40
21%
1940-50
50%
1950-60
18%
1960-70
33%
1970-80
24%
1980-90
24%
1990-2000
24%
That's not what happened. We know from our earlier examination of the 1964-98 period that parallelism broke down completely in that era. But the whole century makes this point as well. At its beginning, for example, between 1900 and 1920, the country was chugging ahead, explosively expanding its use of electricity, autos, and the telephone. Yet the market barely moved, recording a 0.4% annual increase that was roughly analogous to the slim pickings between 1964 and 1981.
Dow IndustrialsDec. 31, 1899: 66.08Dec. 31, 1920: 71.95
In the next period, we had the market boom of the '20s, when the Dow jumped 430% to 381 in September 1929. Then we go 19 years--19 years--and there is the Dow at 177, half the level where it began. That's true even though the 1940s displayed by far the largest gain in per capita GDP (50%) of any 20th-century decade. Following that came a 17-year period when stocks finally took off--making a great five-to-one gain. And then the two periods discussed at the start: stagnation until 1981, and the roaring boom that wrapped up this amazing century.
To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.
How could this have happened? In a flourishing country in which people are focused on making money, how could you have had three extended and anguishing periods of stagnation that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make--that psychological force I mentioned above: People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.
The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium?
And then came along a 1924 book--slim and initially unheralded, but destined to move markets as never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis.
But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."
Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.
Saturday, October 11, 2008
Warren Buffett Interview, 1974
Investors are facing some scary times right now, so I thought it would be good to recall what Buffett said the last time things were this scary.
An Interview with Warren Buffett in 1974
The following interview with Warren Buffett, taken from the November 1, 1974 issue of Forbes magazine, still
makes for interesting and useful reading today.
How do you contemplate the current stock market, we asked Warren Buffett, the sage of Omaha,
Neb.
"Like an oversexed guy in a whorehouse," he shot back. "This is the time to start investing." [Forbes
substituted 'whorehouse' with 'harem' when they printed the story -- a sign of the times.]
The Dow was below 600 when he said that. Before we could get Buffett's words to print, it was up
almost 15% in one
of the fastest rallies ever.
We called him back and asked if he found the market as sexy at 660 as he did at 580. "I don't know
what the averages are going to do next," he replied, "but there are still plenty of bargains around." He
remarked that the situation reminded him of the early Fifties.
Warren Buffett doesn't talk much, but when he does he's well worth listening to. His sense of timing
has been remarkable. Five years ago, late in 1969, when he was 39, he called it quits on
the market.
He liquidated his money management pool, Buffett Partnership, Ltd., and gave his clients their money
back. Before that, in good years and bad, he had been beating the averages, making the partnership
grow at a compounded rate of 30% before fees between 1957 and 1969. (That works out to a
$10,000 investment growing to $300,000 and change.)
He quit essentially because he found the game no longer worth playing. Multiples on
good stocks
were sky-high, the go-go boys were "performing" and the list was so picked over that the kind of solid
bargains that Buffett likes were not to be had. He told his clients they might do better in tax-exempt
bonds than in playing the market. "When I got started," he says, "the bargains were flowing like the
Johnstown flood; by 1969 it was like a leaky toilet in Altoona." Pretty cagey, this Buffett. When all the
sharp MBAs were crowding into the investment business, Buffett was quietly walking away.
Buffett settled back to manage the business interests he had acquired, including Diversified Retailing,
a chain of women's apparel stores; Blue Chip Stamps, a western states trading stamp operation; and
Berkshire Hathaway, a diversified banking and insurance company that owned, among other thing, a
weekly newspaper, The Omaha Sun. The businesses did well. Under Buffett's management, the Sun
won a Pulitzer for its exposé of how Boys Town, despite pleas of poverty, had been turned into a
"moneymaking machine."
Swing, You Bum!
Buffett is like the legendary guy who sold his stocks in 1928 and went fishing until 1933. That guy
probably doesn't exist. The stock market is habit-forming: You can always persuade yourself that
there are bargains around. Even in 1929. Or 1970. But Buffett did kick the habit. He did "go fishing"
http://www.thinkfn.com/content/view/181/ (1 of 3)9/16/2006 4:45:11 PM
Think Finance - Warren Buffet na Forbes em 1974
from 1969 to 1974. If he had stuck around, he concedes, he would have had mediocre results.
"I call investing the greatest business in the world," he says, "because you never have to swing. You
stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a
strike on
you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then
when the fielders are asleep, you step up and hit it."
But pity the pros at the investment institutions. They're the victims of impossible "performance"
measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000
fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional
walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'"
Buffett claims he set up his partnership to avoid these pressures.
Stay dispassionate and be patient, is Buffett's message. "You're dealing with a lot of silly people in the
marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you
should be O.K." First the crowd is boozy on
optimism and buying every new issue in sight. The next
moment, it is boozy on
pessimism, buying gold bars and predicting another Great Depression.
Fine, we said, if you're so bullish, what are you buying? His answer: "I don't want to tout my own
stocks."
Any general suggestions, we asked?
Just common sense ones.
Buy stocks that sell at ridiculously low prices. Low by what standards? By
the conventional ones
of net worth, book value, the value of the business as a going concern. Above
all, stick with what you know; don't get too fancy. "Draw a circle around the businesses you
understand and then eliminate those that fail to qualify on
the basis of value, good management and
limited exposure to hard times." No high technology. No multicompanies. "I don't understand them,"
says Buffett. "Buy into a company because you want to own it, not because you want the stock to go
up.
"A water company is pretty simple," he says, adding that Blue Chip Stamps has a 5% interest in the
San Jose Water Works. "So is a newspaper. Or a major retailer." He'll even buy a Street favorite if he
isn't paying a big premium for things that haven't happened yet. He mentions Polaroid. "At some
price, you don't pay anything for the future, and you even discount the present. Then, if Dr. Land has
some surprises up his sleeve, you get them for nothing."
Have faith in your own judgment or your adviser's judgment, Buffett advises. Don't be swayed by
every opinion you hear and every suggestion you read. Buffett recalls a favorite saying of Professor
Benjamin Graham, the father of modern security analysis and Buffett's teacher at Columbia Business
School: "You are neither right nor wrong because people agree with you." Another way of saying that
wisdom, truth, lie elsewhere than in the moment's moods.
All Alone?
http://www.thinkfn.com/content/view/181/ (2 of 3)9/16/2006 4:45:11 PM
Think Finance - Warren Buffet na Forbes em 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.'
"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."
© 1974, Forbes
http://
An Interview with Warren Buffett in 1974
The following interview with Warren Buffett, taken from the November 1, 1974 issue of Forbes magazine, still
makes for interesting and useful reading today.
How do you contemplate the current stock market, we asked Warren Buffett, the sage of Omaha,
Neb.
"Like an oversexed guy in a whorehouse," he shot back. "This is the time to start investing." [Forbes
substituted 'whorehouse' with 'harem' when they printed the story -- a sign of the times.]
The Dow was below 600 when he said that. Before we could get Buffett's words to print, it was up
almost 15% in one
of the fastest rallies ever.
We called him back and asked if he found the market as sexy at 660 as he did at 580. "I don't know
what the averages are going to do next," he replied, "but there are still plenty of bargains around." He
remarked that the situation reminded him of the early Fifties.
Warren Buffett doesn't talk much, but when he does he's well worth listening to. His sense of timing
has been remarkable. Five years ago, late in 1969, when he was 39, he called it quits on
the market.
He liquidated his money management pool, Buffett Partnership, Ltd., and gave his clients their money
back. Before that, in good years and bad, he had been beating the averages, making the partnership
grow at a compounded rate of 30% before fees between 1957 and 1969. (That works out to a
$10,000 investment growing to $300,000 and change.)
He quit essentially because he found the game no longer worth playing. Multiples on
good stocks
were sky-high, the go-go boys were "performing" and the list was so picked over that the kind of solid
bargains that Buffett likes were not to be had. He told his clients they might do better in tax-exempt
bonds than in playing the market. "When I got started," he says, "the bargains were flowing like the
Johnstown flood; by 1969 it was like a leaky toilet in Altoona." Pretty cagey, this Buffett. When all the
sharp MBAs were crowding into the investment business, Buffett was quietly walking away.
Buffett settled back to manage the business interests he had acquired, including Diversified Retailing,
a chain of women's apparel stores; Blue Chip Stamps, a western states trading stamp operation; and
Berkshire Hathaway, a diversified banking and insurance company that owned, among other thing, a
weekly newspaper, The Omaha Sun. The businesses did well. Under Buffett's management, the Sun
won a Pulitzer for its exposé of how Boys Town, despite pleas of poverty, had been turned into a
"moneymaking machine."
Swing, You Bum!
Buffett is like the legendary guy who sold his stocks in 1928 and went fishing until 1933. That guy
probably doesn't exist. The stock market is habit-forming: You can always persuade yourself that
there are bargains around. Even in 1929. Or 1970. But Buffett did kick the habit. He did "go fishing"
http://www.thinkfn.com/content/view/181/ (1 of 3)9/16/2006 4:45:11 PM
Think Finance - Warren Buffet na Forbes em 1974
from 1969 to 1974. If he had stuck around, he concedes, he would have had mediocre results.
"I call investing the greatest business in the world," he says, "because you never have to swing. You
stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a
strike on
you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then
when the fielders are asleep, you step up and hit it."
But pity the pros at the investment institutions. They're the victims of impossible "performance"
measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000
fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional
walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'"
Buffett claims he set up his partnership to avoid these pressures.
Stay dispassionate and be patient, is Buffett's message. "You're dealing with a lot of silly people in the
marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you
should be O.K." First the crowd is boozy on
optimism and buying every new issue in sight. The next
moment, it is boozy on
pessimism, buying gold bars and predicting another Great Depression.
Fine, we said, if you're so bullish, what are you buying? His answer: "I don't want to tout my own
stocks."
Any general suggestions, we asked?
Just common sense ones.
Buy stocks that sell at ridiculously low prices. Low by what standards? By
the conventional ones
of net worth, book value, the value of the business as a going concern. Above
all, stick with what you know; don't get too fancy. "Draw a circle around the businesses you
understand and then eliminate those that fail to qualify on
the basis of value, good management and
limited exposure to hard times." No high technology. No multicompanies. "I don't understand them,"
says Buffett. "Buy into a company because you want to own it, not because you want the stock to go
up.
"A water company is pretty simple," he says, adding that Blue Chip Stamps has a 5% interest in the
San Jose Water Works. "So is a newspaper. Or a major retailer." He'll even buy a Street favorite if he
isn't paying a big premium for things that haven't happened yet. He mentions Polaroid. "At some
price, you don't pay anything for the future, and you even discount the present. Then, if Dr. Land has
some surprises up his sleeve, you get them for nothing."
Have faith in your own judgment or your adviser's judgment, Buffett advises. Don't be swayed by
every opinion you hear and every suggestion you read. Buffett recalls a favorite saying of Professor
Benjamin Graham, the father of modern security analysis and Buffett's teacher at Columbia Business
School: "You are neither right nor wrong because people agree with you." Another way of saying that
wisdom, truth, lie elsewhere than in the moment's moods.
All Alone?
http://www.thinkfn.com/content/view/181/ (2 of 3)9/16/2006 4:45:11 PM
Think Finance - Warren Buffet na Forbes em 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.'
"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."
© 1974, Forbes
http://
Wednesday, September 10, 2008
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