In 1998, Warren Buffett (BRK.B) spoke to a group of students at the University of Florida as part of the Graham-Buffett Teaching Endowment, which was set up by renowned investor (and UF graduate) Mason Hawkins. During that speech, Warren was asked a question about where the market was headed and responded with the following (bold added for emphasis; sorry for the length, but it’s needed to get the point across):
“I have no idea where the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock. You buy 100 shares of General Motors (GM). Now all of a sudden you have this feeling about GM. It goes down, you may be mad at it. You may say, "Well, if it just goes up for what I paid for it, my life will be wonderful again." Or if it goes up, you may say how smart you were and how you and GM have this love affair. You have got all these feelings. The stock doesn't know you own it. The stock just sits there; it doesn't care what you paid or the fact that you own it.
Any feeling I have about the market is not reciprocated. I mean it is the ultimate cold shoulder we are talking about here. Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so every one of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola (KO) and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your Supermarket. You want it to be down on the weekends not up on the weekends when you tend the Supermarket. The NYSE is one big supermarket of companies. And you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then…
We want things to go down, but I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all. When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in.”
For the people who read my articles, you are probably starting to notice a pattern: I tend to write about things that are pretty straightforward (“Buy great companies you can understand? Wow, this Science of Hitting guy is really going out on a limb…”). The reason I do so is quite simple: most of us aren’t looking to simply maximize our profits (despite what academia might think); in reality, we are looking for a risk-averse way to build our life savings at an attractive rate of return. For the great majority of people, an intelligent investment strategy that focused on buying great companies when they were attractively priced would generate returns that were more than satisfactory.
The problems often come from two issues: people love buying speculative stocks (which almost always have years of stellar growth priced in), and they hate the idea that stock prices might go lower, which causes them to do all sorts of “interesting” things (for lack of a better word). For now, let’s skip point number one, and jump to the second issue, which is the focus of Warren’s comments.
As far as I can tell, most people love cheap stuff; that’s why the best day for retail in the United States involves waking up at some ungodly hour to save on anything from toaster ovens to wrenches. In addition, you would be hard pressed to find someone who hasn’t been happy with the influx of flat screen TV’s and their continued drop in price over the past couple of years (besides the people who make them). Yet when it comes to partial ownership of a business, and a chance to buy a series of future cash flows, people freak out when they get the opportunity to add to their position when the market decides to go on clearance.
If you need the money next week, this makes sense; but as Warren notes, if you’re a net buyer over the coming years, you should PREFER lower prices, not abhor them. As I discussed the other day, you don’t have to worry about clients taking their money back like investment managers do; so why should it bother you that a company has diverged slightly further from its intrinsic value since the last time the Earth made a full rotation? The reality is that it shouldn’t; you should be ecstatic that the market is willing to sell you more of company X at a price below what you thought was a good value last week, last month, or last year.
The other part of Warren’s comments that I want to discuss is where he talks about the market as a whole, saying the following:
“I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all.”
Again, this is very instructive: one of the greatest investor’s of all time tells you that he doesn’t think about the future of the stock market AT ALL, yet everybody and their brother has an opinion on where the market is going (look at Barron’s most recent cover story about Dow 15,000).
This brings me back to my original argument: most of us are simply looking for an attractive rate of return. One way to achieve that goal for the novice investor is to buy great businesses when they are attractively priced on simple metrics like price-to-cash flow, regardless of the macro picture or the outlook for the market as a whole. This strategy would be difficult for some, because it involves avoidance of the hot areas like cloud computing and solar energy, and instead focuses on boring companies with consistent free cash flow generation and year after year of intrinsic value growth.
More importantly, it involves the conviction to keep buying even when the future is unknown; rather than blind faith, this is a realization that certain companies have had attractive business results decade after decade for a reason, and will position themselves accordingly to make sure that regardless of any setbacks, they emerge from the depths of recession in one piece. For the investor who finds these companies and buys them when they go “way down” (as Warren says), they are positioning themselves to achieve their financial goals over time; in the words of Mr. Buffett, “time is the enemy of the poor business and the friend of the great business”.
“I have no idea where the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock. You buy 100 shares of General Motors (GM). Now all of a sudden you have this feeling about GM. It goes down, you may be mad at it. You may say, "Well, if it just goes up for what I paid for it, my life will be wonderful again." Or if it goes up, you may say how smart you were and how you and GM have this love affair. You have got all these feelings. The stock doesn't know you own it. The stock just sits there; it doesn't care what you paid or the fact that you own it.
Any feeling I have about the market is not reciprocated. I mean it is the ultimate cold shoulder we are talking about here. Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so every one of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola (KO) and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your Supermarket. You want it to be down on the weekends not up on the weekends when you tend the Supermarket. The NYSE is one big supermarket of companies. And you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then…
We want things to go down, but I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all. When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in.”
For the people who read my articles, you are probably starting to notice a pattern: I tend to write about things that are pretty straightforward (“Buy great companies you can understand? Wow, this Science of Hitting guy is really going out on a limb…”). The reason I do so is quite simple: most of us aren’t looking to simply maximize our profits (despite what academia might think); in reality, we are looking for a risk-averse way to build our life savings at an attractive rate of return. For the great majority of people, an intelligent investment strategy that focused on buying great companies when they were attractively priced would generate returns that were more than satisfactory.
The problems often come from two issues: people love buying speculative stocks (which almost always have years of stellar growth priced in), and they hate the idea that stock prices might go lower, which causes them to do all sorts of “interesting” things (for lack of a better word). For now, let’s skip point number one, and jump to the second issue, which is the focus of Warren’s comments.
As far as I can tell, most people love cheap stuff; that’s why the best day for retail in the United States involves waking up at some ungodly hour to save on anything from toaster ovens to wrenches. In addition, you would be hard pressed to find someone who hasn’t been happy with the influx of flat screen TV’s and their continued drop in price over the past couple of years (besides the people who make them). Yet when it comes to partial ownership of a business, and a chance to buy a series of future cash flows, people freak out when they get the opportunity to add to their position when the market decides to go on clearance.
If you need the money next week, this makes sense; but as Warren notes, if you’re a net buyer over the coming years, you should PREFER lower prices, not abhor them. As I discussed the other day, you don’t have to worry about clients taking their money back like investment managers do; so why should it bother you that a company has diverged slightly further from its intrinsic value since the last time the Earth made a full rotation? The reality is that it shouldn’t; you should be ecstatic that the market is willing to sell you more of company X at a price below what you thought was a good value last week, last month, or last year.
The other part of Warren’s comments that I want to discuss is where he talks about the market as a whole, saying the following:
“I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all.”
Again, this is very instructive: one of the greatest investor’s of all time tells you that he doesn’t think about the future of the stock market AT ALL, yet everybody and their brother has an opinion on where the market is going (look at Barron’s most recent cover story about Dow 15,000).
This brings me back to my original argument: most of us are simply looking for an attractive rate of return. One way to achieve that goal for the novice investor is to buy great businesses when they are attractively priced on simple metrics like price-to-cash flow, regardless of the macro picture or the outlook for the market as a whole. This strategy would be difficult for some, because it involves avoidance of the hot areas like cloud computing and solar energy, and instead focuses on boring companies with consistent free cash flow generation and year after year of intrinsic value growth.
More importantly, it involves the conviction to keep buying even when the future is unknown; rather than blind faith, this is a realization that certain companies have had attractive business results decade after decade for a reason, and will position themselves accordingly to make sure that regardless of any setbacks, they emerge from the depths of recession in one piece. For the investor who finds these companies and buys them when they go “way down” (as Warren says), they are positioning themselves to achieve their financial goals over time; in the words of Mr. Buffett, “time is the enemy of the poor business and the friend of the great business”.
