Thursday, October 28, 2010

Buffett on Stock Valuations

Here's a good description of how Warren Buffett viewed stock valuations, and how he was viewed more generally, back in the late 1990s.

Excerpt:

Buffett was skeptical of high-tech stocks and...warned of an overvalued market that was heading for trouble. In fact, at that famous summer gathering of media, technology and financial moguls at Sun Valley, Idaho, Warren Buffett was asked to give the concluding talk in July 1999. His remarks, though politely received, supported the view among the smart set that Buffett was out of touch with the "new paradigm" of high technology and ever-rising internet stock valuations.

Buffett's talk...delivered a message that most of his high-tech listeners and their financial sidekicks were not keen to hear. There was no "new paradigm," Buffett said. The market could only yield what the economy produced, and this market was way out of sync in that respect. The next seventeen years, he explained, might not look much better than the dismal 1964-to-1981 period when the Dow had gone exactly nowhere. 


At that time, many didn't really buy into what Buffett was saying would likely happen going forward. In fact, they were expecting far better results* and mostly just viewed him as someone who was simply justifying that he had missed out on the opportunity:

Much of Buffett's message that day was ignored and dismissed – until March 2000, when the "dot com" bubble began to implode. Yet for a time, Buffett was considered by the smart money as "out of it" and "losing his edge;" a guy who had missed the high-tech moment and was now rationalizing his mistake.


These two articles also help capture and summarize what Buffett said at Sun Valley not long before the "dot com" bubble reached peak levels:**

Buffett in Fortune - 1999

Warren Buffett "Preaches" to 1999's Internet Elite

Buffett's message was rather straightforward.

New paradigm?

Not at all.

Thanks to the past decade, stocks overall appear more or less in line with intrinsic value (that's the average...quite a few individual stocks are expensive while others are still cheap).

Though we're not yet seventeen years removed from that Sun Valley talk, Buffett said recently he now views the prospects for stocks favorably going forward. Stocks may have gone nowhere from 1964-1981, but it wasn't necessary to wait until the end of that period to start buying.

In other words, it was a great time to buy well before 1981 even though the market needed until then to finally put the highs of 1964 in the rear-view mirror.

At least it was for those with a long enough investment time horizon.

Adam

* A PaineWebber-Gallup poll done at that time revealed investors were expecting stocks to return something like 13-22% going forward.
** This was covered in Chapter 2 of 'The Snowball'.
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