Shareholder letter 1987 –Mr. Market
Guess what has Buffet to stay in the year of the great crash about the markets when he lost 342 mn US$ personally in the October crash.
Our market also cracking in October. Is October sinful.????
Buffet strangely quotes the market to be his friend who is very emotional. At times he is very euphoric and can see only the positive things. At times he is a manic- depressive mood he will let you anything at any price for he sees everything bad.
I remember Buffet earlier saying: be fearful when others are greedy and greedy when others are fearful.
Something I can associate very well with the markets in India now…which last month rose by 1000 points and this month have fallen by more than 1000 points. While most results have been better than analyst expectations (All analysts were also euphoric). This is because most people tend to invest in stocks and not underlying business. (Easy to say than do. invests in business) This thinking helps if one is into the business of arbitrage but definitely not while investing. And I think the Indian market will also behave like a manic and give ample opportunities to buy. The worst part of investing in the stock markets is that it is addictive. Especially with many real time online portfolio management software’s one tends to see his portfolio position on an hourly basis. Something one does when he is in a Casino.
And my recent experience in the market makes me believe that markets will be anything but fairly valued. I am suddenly reminded of the Efficient market hypothesis. Until and unless the irrationality of human beings can be factored into economic and financial models it would be difficult to get anything but impractical theories out of them. (Heard about: Theory for theory sake)
Buffet says that Mr. . Market is often in a foolish mood and it is for you to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. It is always you that have been right or wrong and not the market.
Therefore to evaluate ones investments one should look at the operating results rather than their daily, or even yearly, price quotations. The market may ignore business success for a while, but eventually will confirm it. As Ben Graham said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Sometimes, of course, the market may judge a business to be more valuable than the underlying facts would indicate it is. In such a case, we will sell our holdings. Sometimes, also, we will sell a security that is fairly valued or even undervalued because we require funds for a still more undervalued investment or one we believe we understand better.
Buffet also speaks about the need to check the trade deficit:
Of course, the U.S. may take steps to stem our trade deficit well before our position as a net debtor gets out of hand. (In that respect, the falling dollar will help, though unfortunately it will hurt in other ways.) Nevertheless, our government’s behavior in this test of its mettle is apt to be consistent with its Scarlett O’Hara approach generally: “I’ll think about it tomorrow.” And, almost inevitably, procrastination in facing up to fiscal problems will have inflationary consequences. Both the timing and the sweep of those consequences are unpredictable. But our inability to quantify or time the risk does not mean we should ignore it. While recognizing the possibility that we may be wrong and that present interest rates may adequately compensate for the inflationary risk, we retain a general fear of long-term bonds.
David Oglivy’s advice: “Develop your eccentricities while you are young. That way, when you get old, people won’t think you’re going ga-ga.”
Comment for those who looking for the one big bet (story):
That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today’s business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.
Business that constantly encounters major change also encounters many chances for major error.
Agatha Christie, whose husband was an archaeologist, said that was the perfect profession for one’s spouse: “The older you become, the more interested they are in you.”
Questioning the dollar exchange value as early as 1987:
Bonds are no better than the currency in which they are denominated, and nothing we have seen in the past year – or past decade – makes us enthusiastic about the long-term future of U.S. currency.
On keeping cash on hand for capital allocation:
Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun.