Buffett on Stock Prices

Its early in this potential correction, but let me remind you of Buffett’s interesting (1997) comments:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

–Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997 

 
Its worth thinking about, regardless of whether the recent investor nervousness turns into something more significant . . .

 

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  1. WickedGreen commented on Jun 15

    BR, are you issuing these cautionary items because:

    a. it’s June and the boys are off to the beach

    b. nothing goes up forever / Hussman has to be right some day

    c. TPP went down in flames, somebody has to be punished

    ?

  2. rd commented on Jun 15

    Unfortunately, the manic-depressive nature of Wall Street means that stocks will be signficantly over-valued or significantly undervalued for extensive stretches. This is what creates the “sequence of returns” risk that can emperil retirement. Ideally, you have a two decade period of undervaluation (say ’70s and ’80s) just before you retire and then a couple of decades of rising and extended high valuations after you retire (90s and 2000s). The reverse is not so much fun as I think many boomers will discover over the next couple of decades.

  3. Nordlys commented on Jun 15

    I’d agree with what Buffett says for my daughters (29 & 32), however, for myself, 63, not so sure. Not worried about a correction, just worried about a “correction” that becomes something more serious, in depth and or time.

    Last time I went to mostly cash was in the Spring off 2007 (back in by Spring 2010), and for where I’m in my life, I’m getting closer to sell out of my mutual funds in my 401k/IRA.

    Just wondering aloud if this experiment by our FED will end up something regrettable, or something that will take us all to the Promised Land?!

    So far, for my portfolio, Promised Land, here I come. However, we are, as a society, leaving a lot of people behind. Am still looking over my shoulder for the “Tide That Lifts All Boats”.

  4. cgercke commented on Jun 15

    I have forty years of savings and only five more to add. I’d say Buffet’s advice is completely nonsensical for me. Probably for him, too. The folksy analogy is still charming, though.

    • DeDude commented on Jun 15

      His point that few people think about the fact that falling stock prices represent an important buying opportunity is very good. If you are a net buyer through the Bear and until prices reach the new high you will likely come out better than if prices had simply stayed flat throughout that same period. However, I agree that the analogy to burgers are not good at all. Nobody has 20 years of burger meat stored in the freezer and even if they did their stash would not be cut in half when/if the price of that meat was cut in half.

  5. VennData commented on Jun 15

    The Oracle is buying Burger King, Kraft, Heinz…

    I think he sees a “health food” bubble.

    • Iamthe50percent commented on Jun 15

      I think he is banking on human nature. Which are rented more? Art films or Kung Fu movies?

  6. Livermore Shimervore commented on Jun 15

    Buffet on buybacks in (2011 letter) re IBM. Same concept, if you are a net buyer, net long, you welcome the dip. See last paragraph if you are short of your afternoon caffeine.

    “Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

    But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

    Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

    I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

    Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

    If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1⁄2 billion more (1 ½ billion dollars) than if the “high-price” repurchase scenario had taken place.

    The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”

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