The stock market according to Buffett
Posted on February 9, 2009 by Richard Beddard
Filed Under Markets |
The curse of the value manager
Well, not Buffett exactly, but Fortune’s interpretation of Buffett.
This chart plots the relationship between the stockmarket and GNP (i.e. the value of US output versus the value of its companies) on the likely the assumption that over the long-term the two are related. In 2001, Buffett told Fortune:
If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.
It probably seemed a distant possibility then, but Fortune’s worked out we’re there now.
Three points:
- The 2001 article includes an interesting history of the stockmarket, taken from a speech by Buffett.
- It would be better to plot global output versus global markets, since the relationship between the two should be closer.
- 75% seems to be the upper end of the normal relationship between GNP and market value, which suggests that the market could fall further (or indeed the market could stay where it is and GNP could rise – except, of course, the US is in recession).
So why is Buffett (thought to be) so Bullish?
Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.
He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling - the Dow Jones industrials have dropped by about 10% since Oct. 17 - so presumably Buffett kept buying.
It’s the curse of the value manager, otherwise surmised as “better early than never.”
We don’t know whether the market will rebound sharply as it did in 2003 or we’ll be no better off in five years time than we are today, but if you’re prepared to hold for long enough, it doesn’t matter much.
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3 Responses to “The stock market according to Buffett”
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Hi Richard,
I am actually starting to think that now would be a good time to start to invest. I cannot invest in the way a value investor does, but I am thinking a broad spread across diverse asset classes, with occasional rebalancing, might be in order.
My feeling is that, if house prices can come down to about 3.5 times average salary (and stay there) then things can start to become normal again. However the governments are so determined to stop this happening that you kind of feel you have to give up in the end.
Also, from a long term point of view, it does not really matter what the monetary worth of a company is so long as its relative monetary worth is maintained. Therefore, although Buffets monetary value may fluctuate depending on the whim of the US government, his physical assets will retain their relative value.
I was listening to some of the dialog going on with the hearings in America and the following phrase comes to mind.
“The collective stupidity of crowds”
Some of the highlights were:
1) The senate members expressed anger and concern that the first $350 000 000 000 of TARP money has effectively disappeared and is untraceable. Well duh!
2) The bankers can confidently claim that all the TARP money was given out as loans and mortgages (as requested) and can assure us that all their bonus and acquisitions have been paid from their own capital and ‘profits’. Interesting logic!
3) Rapture was expressed by one ‘local government’ type about how all these previously shelved projects [read ‘pointless wastes of money’] are now going to be implemented due to the sudden and massive influx of cash. If you were wondering how Obama had managed to turn 2.5 million new jobs into 4 million, well now you know.
I am not clear what happens once the projects have been finished. I hope some of them will lead to long term sustainable new industries!
Hi Robin
I think so too. At least it’s a lot better time to start investing than any other time in recent memory! To be honest I’m not trying to unravel the policy situation. One hopes they’ll do better than in previous crises and the global nature of this one won’t trip them up (see a post I’m going to put up later today or tomorrow). I’ve just received Shiller’s latest book, Animal Spirits, which should shed light on it.
You don’t have to look much further than our own bankers appearing before Parliament and revealing that they, the regulator, and the PM were all sucked in to the ’stupidity of crowds’ or animal spirits as Shiller and his co-author Akerlof and their predecessor Keynes would call it.
As for value investing, I think it’s a good time to buy financially sound companies at less than sixteen times they’re average annual earnings - there are a lot to choose from. Unfortunately nobody wants to know! Look at how many comments market oriented blogs here get compared to company oriented ones. Either I’m much better at the market stuff (seriously doubt that) or people are so distracted by events and fearful of the future, they’re not tuned into the value story - the other curse of the value investor!
Hi Richard,
I have to say that Buffet has been remarkably inconsistent (and extremely vocal about it) for the last year or so. He has also been plain wrong for most of the time. If he is only seeing doom and gloom now (as of 9th March 2009) then it may be the greatest buy signal in stock market history.
Anyway, I was watching an old episode of Top Gear a few days ago and it was filmed in Japan. They were doing their usual contrived race. This time Clarkson (as usual, in the fancy sports car) and Hammond and May on the bullet train. It occurred to me that, if we get nothing else out of the next Great Depression, we could at least get a few super fast trains, a spectacular bridge to the Isle of White, and some great hybrid vehicles.
Always look for the silver lining.