Appreciate the link. Looking forward to reading that interview soon.
Reading between the lines isnt necessary as you seem pretty clear in your belief that the market is due for a crash. As a new investor, I look at the rapid increases of a ton of stocks and think the same thing. My counter thought is a perfect storm of stimmy money, inflation and the rise of trading apps and retail investors, is here and will continue to inflate the market.
The Covid crash didnt reallt last long unless it was in an industry fully correlated to the virus (travel & hospitality). If a crash happens now, do you foresee something being a multi year hit or a quick hit? Also, assuming vax rollout provides a quasi return to normalcy, I feel like there is a ton of pent up demand to spend that the market is going to roar this year.
I'm not looking for a debate, nor am I trying to be confrontational. I'm a student of history and you obviously know you're **** a lot more than I do. So I value your input here. I watched the Grantham interview you posted last week and was left with the opinion that he's a bitter guy who has sat on the sidelines waiting the last x years and trying to create a self fulfilling prophecy.
Would love to have a good dialogue and learn. Either here or via email.
Thank you. I hope you find the talk I posted helpful, and would recommend his follow up discussion to it published in Fortune in 2001.
Are we staring at a crash? I don’t know. Assessing whether something is under or over valued isn’t the same thing as predicting the near to intermediate term price performance of a security. I pay no serious attention to those who predict, for example, that a crash is imminent. Discussing valuation, however, is very relevant since it is a substantial component of further expected returns. And perhaps that’s the greatest insight offered by Buffett, but really more from Ben Graham. Price and value are NOT synonymous, A share of stock is a share ownership in a business. Perhaps the best way to view this is to look at almost any large cap stock’s 52 weeks trading range, Now, has the value of that company, which is nothing more than the future cash that that business will generate adjusted to reflect the present value of those cash flows, changed by the same amount that the share price has changed over that period of time? Not likely.
And here’s the way Buffett summed it up back in his 1987 letter to shareholders:
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
That’s the way to view the price vs value relationship, and is the first real underpinning of any investing philosophy. The second, and equally critical, concept is margin safety.
