Warren Buffett on Greed and Fear
October 20, 2008
When Warren Buffett, the so-called “Oracle of Omaha,” speaks, people listen — or at least they should. He is one of the world’s most successful investors (and, hence, one of the world’s richest men). He has shared his investment advice (and success) with fellow investors in Berkshire Hathaway, where he serves as CEO and is the company’s largest shareholder. At the time I was drafting this post, Berkshire Hathaway stock was up even though the stock market in general was down. So when Warren Buffett says buy — and buy American — people should hear him out. He discusses his current thinking in a recent op-ed piece. [“Buy American. I Am.” New York Times, 17 October 2008]. Buffett begins his op-ed by pointing out the obvious:
“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.”
The volatility of stock markets around the world indicates that others have seen these problems and panicked. How has Buffett reacted? He tells us:
“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. Why? 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.”
I couldn’t agree more with Buffett’s reasoning. Bubbles emerge when people are swept away by irrational exuberance and those bubbles burst when they realize that sound economics — not greed and hope — have been ignored. I have written before that America needs to be more frugal, but I’ve also expressed an optimism shared by most entrepreneurs — including Warren Buffett. I believe that America is resilient and I have expressed that belief to others. One individual with whom I’ve conversed is an investment banker. This is not a good time for most investment bankers; but mine remembered our discussion and it was he who emailed me a copy of Buffett’s op-ed piece along with the comment that Buffett and I thought alike.
In the weeks and months ahead — here and on the Enterra Solutions’ web site — you will find announcements concerning investments the company is making in U.S. assets. Basically, we will be investing in good value U.S. assets that offer cutting edge technologies that Enterra Solutions can use to strengthen the management consultant services we offer overseas (more on that below). Let’s get back to Buffett’s op-ed piece. He knows that the moniker “Oracle of Omaha” confers on him a mystical quality that he somehow can predict market movements. He uses the op-ed piece to disabuse people of such a foolish notion. He writes:
“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.”
In a future post, I will discuss why The Economist believes there will be a “spring” — especially in emerging market economies – maybe not an “early spring” but spring nonetheless. Those economies are likely to be the drivers of history. Buffett, however, wants to look back before he looks forward.
“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.”
We’ve all heard the old adage “buy low, sell high.” Yet it takes a real act of faith to buy stocks when the stock market seems to be falling apart. That is why we need to hear calm and steady voices that remind us that buying something at a discount is a good thing. In this age of Walmart and Kmart, you would think that we would understand that underlying logic. The problem, of course, is that we also live in an age of advertising and are daily besieged by messages containing lies and half-truths. Disgraced financial institutions were trying to convince us that our money was safe with them even while they were bailing water from their sinking boats. Buffett’s track record sets him apart from such charlatans. So what does he think?
“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.'”
Every entrepreneur pursues a vision of the future that keeps him or her motivated. It helps them to fight the good fight when things look difficult. I know about those hopes and those struggles since I have been an entrepreneur most of my adult life. That’s why I know that Buffett is right. I spend my time looking at where I want to be and working towards getting there. Fortunately, I have investors who think the same way. They took a chance on my company, Enterra Solutions, and most of them got shares at a deeply discounted price. The company is now in a position to look for investment bargains that will help us “shrink the Gap” (to use my colleague Tom Barnett’s term) by helping emerging market countries implement best practices and international standards in their business and government activities. As Buffett calmly reminds us, this is a good time for people to be smart rather than fearful. He concludes:
“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.”
I believe that my optimism about the future has managed to thread its way through most of my posts. Since events in emerging markets — rather than events in the U.S. — have been the primary focus of this blog, my optimism is often directed at the benefits of globalization and the emergence of middle classes around the world. Two of my most recent posts [Good or Bad Time for a Green Economy? and Green Capitalism and the Map of Grand Challenges] are examples of how I think good things can emerge from bad times in America. The truth is that the world is now so connected that events in one part of the world almost always affect events elsewhere. That means that my optimism about emerging markets can also be expressed as optimism in America. My investment banker knew I’d like Buffett’s op-ed piece because he knows I see opportunities, even in bad times. My company is going to be addressing the demand side of the development equation overseas by strengthening the supply side of our company through investments in undervalued U.S. firms. I realize that many Americans have had retirement plans devastated by the current state of the stock market, but even they should take heart. Warren Buffet, who is 78 and no spring chicken, is not looking back on a life well lived but is looking forward to a future in which we all can live better. It starts with renewing our trust in America and its future. Buffett’s buying – and so am I.