Friday, February 25, 2011

Buffett: Fear & Greed Epidemics - Berkshire Shareholder Letter Highlights

Warren Buffett wrote the following in the 1986 Berkshire Hathaway (BRKashareholder letter:

"...when companies with good economics and good management sell well below intrinsic business value - stocks sometimes provide grand-slam home runs. But we currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction: we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease."

Finding businesses with favorable economics selling below intrinsic value is hard enough. Get that right and the short to medium term price action of an individual stock or the market as a whole doesn't matter all that much. Huge amounts of energy is put into trying to guess/predict near term price movements of individual stocks and markets.  It is, for the most part, a waste of brain power in my view.

If I buy a stock it's because the economics of the business seem sustainable and the price is low relative to my judgment of current value and likely future growth in value. Yet, I have no idea what the stock price is going to do in the short to intermediate term (though it's a bonus if after I buy a stock the price stays low or goes lower as a greater percent ownership of the profits and productive business assets can be inexpensively accumulated over time).

If correct in my assessment, the economics of the business itself will produce good results for me as one of the owners over a 5 to 10 year or preferably longer horizon. If I'm wrong, it won't. No trading required.

Figuring out what an individual business is worth and whether the favorable economics it has will be sustainable isn't easy but seems more doable than trying to make sense out of near term price action.


Long BRKb

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.