“It is rare, one is told, for an American to invest, as many Englishmen still do, ‘for income.’ And he will not readily purchase an investment except in the hope of capital appreciation…The American is attaching his hopes, not so much to its prospective yield, as to a favorable change in the conventional basis of valuation.”
– John Maynard Keynes
Warren Buffett is a remarkable man. He is, off and on, the richest man in the world. And yet, he has built no company…won no World Series… nor has he invented anything…nor even hit a record.
Buffett has made his fortune by investing. He took over a small textile mill in 1965 to use as his investment base. Since then, he has averaged 24% annual growth in the stock price. You could have bought the stock for only $12 in ’65. Today, you will pay $67,000 per share.
So doing, Buffett has become an inspiration to millions: the world’s ultimate capitalist. Any fool can pick up the phone and buy a stock. Many do. And all hope to get rich, just like Buffett.
George Soros, by contrast, is a speculator, not a capitalist. Unlike Buffett, he doesn’t try to own the means of production. He merely guesses about which way prices are likely to go and makes his bets accordingly.
Sometimes Soros is right and makes money. Sometimes he is wrong – as he was last year, loading up on tech stocks just months before they crashed.
Speculators have to be smart, or lucky, to make money. They need to bet against the crowd (otherwise, the odds are unfavorably short) – and guess right. A speculator only wins when others lose. He will only win big when many others lose.
Buffett is not a gambling man. He does not bet on the direction of stock prices.
Berkshire Hathaway held its annual meeting over the weekend. Recording devices weren’t allowed. Still, there were many reports in the press. Plus, a fund manager who attended typed up his notes and sent them to me.
Investors hoping to get in on the current bear market rally might want to reflect on Buffett’s comments. To that end, I give you today’s letter.
“People will always do stupid things,” observed the Sage of Plains. “Over the next 20 years, I guarantee it. The question is, will we be able to take advantage of it?”
One of the stupid things they always do is to try to bet against the pros. Another stupid thing they do is try to bet at all. And a stupid thing they are doing right now is betting that the U.S. stock market has just put in “the most expensive bottom in history”… a ‘bottom’ so high that – even at its lowest point – stocks were still more expensive than ever before in the market’s history.
You may recall that James Cramer was both astonished and delighted as the amateurs beat the pros in the Great Tech Bubble of ’98-2000. The pros just didn’t seem to understand that it was a New Era. Or, as Keynes put it (above) a “change in the conventional basis of evaluation” had been made.
Of course, no such thing had happened. Instead, Wall Street had laid a trap for unsuspecting investors:
“Wall Street monetized the hopes and dreams of millions,” said Buffett. “Lots of money was transferred from the gullible to the promoters,” he continued. Wall Street gathered dumb money unto itself like a cult leader collects teenage airheads, “not by great performance,” said Buffett, “but by great promotion…it’s been a huge trap…”
This is “the way to make a huge amount of money…the biggest money made on Wall Street in the past few years,” he added.
Investors buying stocks today face huge risks. Greenspan may not find the perfect fed funds rate – it may not even exist. The economy may not rebound. Earnings may not recover – they may get worse. Layoffs may continue. Consumers may be unable to keep spending. The dollar may fall. Inflation may rise. Any, all, or none of these things may contribute to a collapse in stock prices. A return to the 70-year trendline of the Dow, for example, would mean a loss of three-quarters of the Dow’s value. And the Nasdaq – well, never mind.
But the average investor – baited by Wall Street and egged-on by the financial media – seems to be sure that the ‘Worst is Over.’ The latest polls show that he expects annual stock market gains from 12% to 20% over the next 10 years.
Buffett believes investors are anticipating an unnatural act: “The probability of us achieving 15 percent growth in earnings over an extended period of years is so close to zero it’s not worth calculating,” said Buffett. “And nor do we think any large company in the United States is likely to (post such growth).” Of the Fortune 500 firms, he added, only 2 or 3 might be about to sustain 15% annual growth rates for an extended period.
“Fifteen percent (return on stock investments) is a dream world,” he warned.
“It’s simply crazy to have such very high expectations,” added Charlie Munger, Buffett’s 77- year-old partner at Berkshire… “Years ago 15 percent return was regarded as impossible, now they say ‘so what’?”
While Soros jumped into tech stocks at nearly the worst possible moment, Buffett avoided them. Soros thought they were going up and didn’t want to miss the move. Buffett didn’t care where they were going.
You see, Buffett does not try to guess the market’s direction. He doesn’t really care what direction his own stock goes – except that he is happy to be recognized as a genius when it goes up.
“People who bought tech stocks, or any other kind of stocks, because they think it’s going to go up next year, or because their neighbor told them to do it – they should get out of the investment world,” Munger explained. “That is not a way to make money over time.”
Buffett understands how to make money over time: buy businesses that make money…and use the money to buy other businesses that make money. Buffett prefers to buy whole businesses, not stocks. “Forget the stock market,” he says.
The stock market is for suckers, Buffett might have said, had he not been addressing an audience of 5,000 of his own shareholders. The stock market is a place to sell businesses, not buy them. But those listening to the Oracle of Omaha surely missed the point. Their enthusiasm for Berkshire shares has driven them up along with the rest of the market, to the point where they are no bargain.
Berkshire shares pay no dividends. Investors can only hope that they go up. Buffett’s shareholders are doing exactly what Buffett cautions against: speculating on the direction of the share price.
Would Buffett buy them himself? Not a chance, dear reader, not a chance.
May 3, 2001
*** Yesterday’s close makes 4 in a row to the upside for the Nasdaq – up 52 points on the day. Big Tech is Back!
*** Its coattails weren’t quite long enough to pull the Dow into positive territory, however. The index shed 21 points. The Nasdaq is 60% above its low but still 56% below its all-time high.
*** Gold, meanwhile, continues to inch its way forward – up an even $1 for the day..
*** Even so, gold is still only $13 above its lowest point in the last 22 years, $252 set in August 1999. Bear markets can last a very long time, dear reader. Many thousands of gold investors have gone to their graves while waiting for the price to come back. So too did many thousands of stock investors, after 1929, find their final reward in heaven or hell long before their stocks recovered a quarter of a century later.
*** Everyone knows that tech companies have more widgets in their warehouses than they can sell. But how did they get there? Tech companies were supposed to use information-age systems to eliminate excess inventories…What went wrong? USA Today writes, “Companies ranging from Cisco Systems to EMC to PMC Sierra were so gung-ho going into 2001, they ramped up for what they expected to be a banner year. How could they resist? After all, Cisco CEO John Chambers just in August told investors: ‘The second Industrial Revolution is just beginning.'”
*** A companion story in USA Today strikes an uncharacteristically skeptical tone. Writer Adam Shell proclaims, “As nice as the resurgence in technology stocks might seem, the fact is that it has boosted many [formerly] leading tech stocks back to the kinds of valuations that got them in trouble in the first place.”
*** Naming names, Shell notes the recent PE multiple expansion of a few highly esteemed S&P 500 constituents. “Software behemoth Microsoft’s PE has risen to 39 from 29. Chip leader Intel’s multiple ballooned to 55 from 33. PC giant Dell Computer’s multiple is up to 33 from 28.”
*** “This is the most expensive ‘bottom’ ever,” James Chanos, one of the nation’s most enduring (ergo, successful) short-sellers, told investors at Grant’s Spring Conference in Manhattan, reported to us by our man on the scene, GrantsInvestor.com’s Eric Fry. Chanos pointed out that on the day of the April 4th bottom – heralded retroactively by the market seers on CNBC – the S&P 500 sold for 22 times earnings, 5 1/2 times book value and in terms of the index’s negligible dividend yield Chanos simply said, “Never mind.”
*** Today, the Ante-bottom S&P 500 finds itself selling for an even more distended 28 times earnings. As for the NASDAQ’s PE – never mind.
*** No bargains at the gas pump either. “Barely May…barely driving season…barely warm in the U.S…and yet, gasoline prices are soaring to new contract highs,” notes Weldon’s Money Monitor. “The precious pink liquid is now above last year’s wholesale price highs.”
*** While no single reason accounts for the price spike, Weldon points out, “Refinery outages continue to plague the US market, and is causing major summer-supply anxiety [although “SSA Syndrome” is not yet officially recognized by the American Psychiatric Association], as nobody wants to be caught without product heading into May.”
*** The only investors almost as thoroughly fatigued as gold bulls are the bulls on Japanese stocks. For more than a decade, too many false dawns have produced nothing more than continuing darkness. But now, with the ascendancy of Japan’s new prime minister, Junichiro Koizumi, hope radiates from the horizon once more in the “Land of the Rising Sun.”
*** “Junichiro Koizumi is different,” the Far Eastern Economic Review pronounces. “He doesn’t mince his words. He wants to do away with the factions that divide his powerful political party. He wears gray suits. He doesn’t die his salt-and- pepper hair jet-black. He has a fire in his belly. None of these things will make him a great prime minister, but they all set him apart from the three candidates he defeated to lead the ruling Liberal Democratic Party and, by extension, Japan.”
*** “Now Koizumi has to deliver and…there is no shortage of issues demanding attention,” the Review writes. “[P]ublic debt is approaching 130 percent of GDP and bad debts continue to clog the banks’ balance sheets.”
*** But the Review paints a hopeful portrait nonetheless, quoting political science professor, Kuniko Inoguchi, of Tokyo’s Sophia University who says, “The public is quite ready to embrace him…The public has finally come to embrace this idea of reform and support strong reform initiatives.” But will the public start spending? “Japan is a mirror image of America,” observed James Grant at yesterday’s conference, “in that it has had 10 years of low consumption, everybody’s in cash instead of stocks…Nobody buys a golf shirt anymore.”
*** On why this might be a good time to buy a golf shirt in the U.S.A. Grant noted, “The Fed is cutting interest rates in the face of the rising inflation rate. This is something new. We think that great things lie ahead for the CPI,” he quipped.
*** “I do think inflation has picked up a bit,” commented Fed Governor Robert Perry, “I think you could make a case that inflation has accelerated. Is that a major concern for the future? I don’t think so.” The Fed isn’t worried about inflation. Another good reason to buy your golf shirt now. It will be more expensive later.
*** “Now comes the aftermath of the credit boom,” writes my friend John Pugsley, chairman of The Sovereign Society. “In the past year, household assets have fallen by some $4 trillion, or Americans have seen about 20% of their nine-year gain dissolve. Rather than taking their 80% winnings and going away happy, however, we hear cries for the “hair-of-the-dog” antidote: lower interest rates.”
*** Yesterday’s New York Times presented a fine story about the resurgent nuclear power industry. Almost unimaginable even one year ago, numerous utilities are submitting applications to construct new nuclear power plants.
*** In contemplating the unimaginable some three months ago, grantsinvestor.com’s Andy Kashdan wrote, “Nuclear power will probably never be as popular as Britney Spears, but in the Western world, it trails even the much maligned brussel sprout. The California debacle, however, may change American tastes – at least in the longer term. It’s much easier to be an environmentalist when the lights are on.”
*** As a way to cash in on the not-yet-evident trend, Kashdan recommended Saskatchewan-based Cameco Corp., the world’s largest producer of uranium, the fuel used in nuclear reactors to generate electricity. Cameco (Toronto: CCO; NYSE: CCJ) accounts for about a third of global uranium production. The stock has advanced about 20 percent since Kashdan made his call. “Of course, it’s rallying off truly stunning declines, and the index still sits 56% off its all-time high.”