It is not terribly hard to tell when we are close to a bottom. Clients start to worry and call about their portfolios; the papers are full of dire predictions with pictures of bears and investor sentiment data reaches multi-year lows.
We do not know whether good prices will become better prices, but we can know a good value when we see it and take advantage of these temporarily low prices when they present themselves. If the market drops another 50% and companies’ earnings are not affected, we will be that much more excited to be able to own and buy at even better prices. We get even more excited when some of the best investors in the world like Warren Buffett start buying with both hands.
Warren Buffett has commented extensively on the folly of predicting markets in the short run, but he has made many timeless predictions over the decades about how to act over the long run.
WHAT ARE SOME OF BUFFETT’S TIMELESS PREDICTIONS?
Good times will prompt bad decisions. In his 2000 Letter to Berkshire shareholders, Buffett compared the crowd that buys big when prices are high to Cinderella at the ball. “They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
There will be more dancing at another wild party followed by another painful hangover. Looking back at the Internet bubble, Buffett is quoted as saying, “The world went mad. What we learn from history is that people don’t learn from history.”
Recessions cannot be avoided forever. Although the last recession took 12 years to develop after the great financial crisis, the next one may be closer than many wish to believe.
We’ll survive current and future recessions just as we’ve survived past problems. As Buffett told us in August, 2007, (and repeated throughout 2008 and 2009): “We’ve got a wonderful economy… There’s never been anything like that in the history of the world. We live seven times better than the people did a century ago on average… We’ve had problems all along. If you look at the last century, we had the Great Depression and World War Two, we had the Cold War, we had the atomic bomb, but the country does well.”
Recessions will create opportunities. Warren Buffet has been buying aggressively since March of 2022. So far this year he has bought significant stakes in Oxidental Petroleum, Activision and Hewlett Packard and has added to his position in Chevron. He is not waiting for the economy to get worse before he buys, however. He is willing to acquire pieces of companies or whole companies whenever the price comes down to levels, he feels is attractive. Recessions just create more buying opportunities than most other periods.
The crowd will make mistakes. Buffett cites this piece of advice from his mentor Benjamin Graham: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right, and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.
Investors will mistakenly think falling stock prices are bad. “If they reduce the price of hamburgers at McDonald’s today, I feel terrific. Now I don’t go back and think, gee, I paid a little more yesterday. I think I’m going to be buying them cheaper today. Anything you’re going to be buying in the future, you want to get cheaper.”
All stocks won’t be cheap. Like Ted Williams waiting for the right pitch, a successful investor waits for the right stock at the right price, and it doesn’t happen every day. “What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out.” You get in trouble, Buffett says, “when you listen to the crowd chanting, Swing, batter, swing!”