“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)”
-Warren Buffett, as the world slid down the cliff towards financial meltdown in late 2008.
(For the record, the Dow closed at 16,576.66 to end 2013, a 25,016% increase!!)
It’s easy to admire and aspire to emulate a wonderful man like Warren Buffett.
In this Part 1 introduction post (part 2 and part 3 here) and of a multi-segment look at Value Investing, I want to take a closer look at quite possibly the greatest value investor of all time – The Oracle of Omaha, himself, Warren Buffett. Buffett has amassed a fortune as the chairman of Berkshire Hathaway, a textile manufacturing firm turned conglomerate and holding company for his diversified investment portfolio. With an unassuming, humble, often self-deprecating sense of humor and candor, Buffett has a knack for cutting through all the noise, speculation, rabble-rousing, and chest beating Wall Street can muster by providing consistently clear “Ah-Ha” truisms that just make sense.
He’s a rational, common-sense thinker. Anyone who’s ever seen him speak on CNBC or any other public forum, can understand and appreciate his jovial, even colloquial approach. He’s just a feel-good kind of guy. The love he has for stock selection, philanthropy, and the good ol’ US of A, is a true inspiration to me and droves of other Buffett followers.
The richest person on earth in 2008 according to Forbes and a net worth of roughly $44 billion in 2012, sure, but you’d never know it if you walked past him on a sidewalk in his Omaha, Nebraska hometown.
Carol J. Loomis, long time chief journalist on Warren Buffett at Fortune Magazine, wrote in 1988:
“Meeting him, most people would see little evidence of ego at all. Buffett is down-to-earth, ordinary looking in a pleasant, solid Midwestern way – as a private eye, for example, he could blend into any crowd – and in matters of dress not snappy. He likes McDonald’s and cherry Cokes and dislikes large parties and small talk. But in the right setting he can be highly gregarious and even a ham: This winter, at a Cap Cities management meeting, he donned a Salvation Army uniform, tooted away on a horn, and serenaded the company’s chairman Thomas Murphy, by singing, ‘What a friend I have in Murphy,’ featuring lyrics he had written.”
Buffett – What a Life!
Born as the second of three children on August 30, 1930, Warren displayed an early prowess for numbers, money, and investing, and dreamed of becoming the world’s youngest millionaire. He spent his childhood virtually memorizing books (one in particular, fittingly called One Thousand Ways to Make $1000), thinking about stocks, and experimenting with investment and trading strategies. He bought his first stock, Cities Service preferred, at age 11 for $38 per share before it subsequently dropped to $27. He held on to the stock until it recovered to $40 where he sold it. The stock later rocketed all the way to $200, and as the story goes, Warren learned his first lesson on patience. It was during these young years that Warren bought and ran a paper route, claiming his bike as a $35 tax deduction (c’mon…seriously!).
Buffett went on to attend the University of Pennsylvania at age 16, and transferred two years later back home to the University of Nebraska. As a senior, Buffett read a book that would propel his life down the path of investment genious. Benjamin Graham, considered the Father of Value Investing, had recently published a book called The Intelligent Investor, where he professed that investors should look to buy stocks below their “intrinsic value” in order to attain a “margin of safety” – concepts that resonated clearly with the young Buffett, as well as all value investors today.
(Sidenote: We’ll go into more depth on the details of value investing in subsequent posts.)
Warren went on to attend the business school at Columbia where Benjamin Graham was teaching classes on security analysis. After much nagging, Graham eventually let Warren work for him at his investment company, Graham-Newman, in 1954.
Armed with an arsenal of investment acumen learned from Graham and a ferocious intellectual curiosity, Buffet returned to Omaha a few years later to embark on his own personal investment journey, forming a wildly successful investment partnership (returning 29.5% annually over 13 years!) and later his Berkshire Hathaway conglomerate we know today.
Buy American. I Am.
The above bold text is the title of an op-ed written by Warren Buffett as the world teetered on the edge of complete financial meltdown in October of 2008. Just a month earlier, the 158 year old investment bank, Lehman Brothers, sank into the largest bankruptcy in history (I was working there when it happened!), and the world was crumbling into a crazed panic looking for answers and hope. Along comes Buffett with the following calming, clear prose on October 16, 2008 in the New York Times:
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.
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.
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.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Boom. Ok, now back to my commentary…
I have found no clearer example of real life value investing than the above op-ed, and no better way to begin our exploration of the topic. Value investors must have the courage, conviction, and cognitive ability to look past the short-term upheaval and emotion in order to double down on the truth.
The truth is that the American spirit ALWAYS will win in the long run.
Since 1776, Americans have proven time and time again that we can overcome insurmountable odds – wars, depressions, scandals, oppression – to achieve steady and consistent progress. And with this progress comes economic prosperity that can be shared by all those who have the desire and drive to work, produce, innovate, provide for their families, and flourish. We are a nation built on an entrepreneurial spirit driven by capitalism. As investors in stocks of great American companies, we have the opportunity to support and share in that continuous and prosperous growth our great country endorses. I’m a stock investor because I believe that prosperity will win like it always has in the long run. As history shows, the long term trend is growth, big growth!
The trajectory of humanity is constant improvement. Over time, this translates to growing economies, growing earnings, and subsequently growing market values of stocks. Society is a train that’s constantly moving forward, fast or slow, but always forward. I may jump on right before it slows down (bear markets come and go), but it’s still moving forward. I’d just assume be riding that train rather than watching it go by.
For this post, I want to give special thanks to Carol J. Loomis and her wonderful book Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013. I’ve been reading it lately, feeling inspired to share a post about this truly amazing man and his consistently refreshing optimism on life and investing.
I’d love to meet fellow value investors, so please comment and introduce yourself!
All the best,