The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [9]
“To all you fellow ring-kissers, I would like to talk today about the stock market,” he said. “I will be talking about pricing stocks, but I will not be talking about predicting their course of action next month or next year. Valuing is not the same as predicting.
“In the short run, the market is a voting machine. In the long run, it’s a weighing machine.
“Weight counts eventually. But votes count in the short term. And it’s a very undemocratic way of voting. Unfortunately, they have no literacy tests in terms of voting qualifications, as you’ve all learned.”
Buffett clicked a button, which illuminated a PowerPoint slide on a huge screen to his right.17 Bill Gates, sitting in the audience, caught his breath for a second, until the notoriously fumble-fingered Buffett managed to get the first slide up.18
DOW JONES
INDUSTRIAL AVERAGE
December 31, 1964 874.12
December 31, 1981 875.00
He walked over to the screen and started explaining.
“During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune five hundred companies grew more than fivefold.*2 Yet, during these seventeen years, the stock market went exactly nowhere.”
He backed up a step or two. “What you’re doing when you invest is deferring consumption and laying money out now to get more money back at a later time. And there are really only two questions. One is how much you’re going to get back, and the other is when.
“Now, Aesop was not much of a finance major, because he said something like, ‘A bird in the hand is worth two in the bush.’ But he doesn’t say when.” Interest rates—the cost of borrowing—Buffett explained, are the price of “when.” They are to finance as gravity is to physics. As interest rates vary, the value of all financial assets—houses, stocks, bonds—changes, as if the price of birds had fluctuated. “And that’s why sometimes a bird in the hand is better than two birds in the bush and sometimes two in the bush are better than one in the hand.”
In his flat, breathy twang, the words coming so fast that they sometimes ran over one another, Buffett related Aesop to the great bull market of the 1990s, which he described as baloney. Profits had grown much less than in that previous period, but birds in the bush were expensive because interest rates were low. Fewer people wanted cash—the bird in the hand—at such low rates. So investors were paying unheard-of prices for those birds in the bush. Casually, Buffett referred to this as the “greed factor.”
The audience, full of technology gurus who were changing the world while getting rich off the great bull market, sat silent. They were perched atop portfolios that were jam-packed with stocks trading at extravagant valuations. They felt terrific about that. It was a new paradigm, this dawning of the Internet age. Their attitude was that Buffett had no right to call them greedy. Warren—who’d hoarded his money for years and given very little away, who was so cheap his license plate said “Thrifty,” who spent most of his time thinking about how to make money, who had blown the technology boom and missed the boat—was spitting in their champagne.
Buffett continued. There were only three ways the stock market could keep rising at ten percent or more a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees and government and other things, rose above its already historically high level.19 Or, he said, the economy could start growing faster than normal.20 He called it “wishful thinking” to use optimistic assumptions like these.
Some people, he said, were not thinking that the whole market would flourish. They just