When all you read is gloom, turn here for a much different perspective.

Saturday, January 3, 2009

What was Warren Doing in 1974? How about 2008?

"Now is the time to invest and get rich." -Warren Buffet, October 1974

Most measurements indicate that the Great Depression and today's economic situation have very little in common. If you agree with that assertion, then let's start looking at 1974 instead. Why? Because, we will discover what Warren Buffet decided to do in the face of that mid-70s "economic collapse."

As we saw in yesterday's post, the stock market chart for 1974, looks surprisingly similar to the 2008 stock market chart. From October 1973, through the end of 1974, the markets collapsed.

You may have seen Buffet's recent quotes and interviews:
  • "Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
  • "Cash is trash", he writes in the NY Times. "Today people who hold cash equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."
And he's putting his cash where his mouth is today.

But what did he do back then?

From his book, Buffett: Making of an American Capitalist,"… His paper losses worsened significantly in 1974. And his net worth, as measured by Berkshire’s share price, fell by half." Yet those "losses" did not discourage the man at all.

In fact the guy was salivating. He wrote this to his shareholders to wrap up 1974, “We consider several of our major holdings to have great potential for significantly increased values in future years, and therefore feel quite comfortable with our stock portfolio.”

And what did he say to the media of the day? With the markets down significantly, and no clear end in sight, the media was hyping gloom and doom at a fever pitch. Forbes magazine interviewed Buffett, and he made his first ever public prediction about the stock market. "How do you feel?" Forbes asked. "Now is the time to invest and get rich. "

And then there was 1975.

And since then, Buffett has made few predictions public and -- as far as I know -- no direct advice on the time to buy or sell stocks.

Until now: “Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

The much hyped "credit crisis", the existing recession, housing, and stock market decline, have clearly scared a lot of people. These are unprecedented times. But in many ways, not unique.

So you can:

  1. Try to guess when the recession might end. Try to guess when stocks will run up again. Look for technical V-, U-, or L-shaped market bottoms. Wait for consumer confidence to return. Guess on some other indicator. OR
  2. Follow Buffett’s lead, find some depreciated assets, and bottom feed now.


  1. I opt to disagree with your statement of "But in many ways, not unique."

    When lines of credit start failing one should pay attention because the financial failings in the States have boiled over into the world market's ability to do what they have been doing for the last twenty years:

    Ship cheap goods around the world at discounted prices.

    Simply put, when shipping fails - when banks can't trust that the credit note will be honoured when the cargo reaches dock then you see the awful horribleness of this crisis and the rupturing of the veins of the global economy begin to burst.

    Now as to your using Buffet as an "investor model" for your readers I would like to point out two fallacies:

    1. Buffet buys companies, not equities. This is the craziest mistake the Motley Fool makes as there are fundamental differences between the two types of investment. He buys companies, not equities.

    2. I'll give you a mathematical example because that's the easiest way to explain your investment error.

    Let's pretend there was in 1974, an ETF that was 1/10 of the DJIA OK?

    Furthermore, let's say an investor buys in on October 8, 1974 when the DOW was at 602.63 which would have made his share price $60.26.

    Now, we're looking for a "ten bagger" or ten times what the share price was right? That's a significant win I would argue.

    It would not have been until October 16, 1996 when that purchase would have achieved a ten fold increase.

    Are you arguing that we should invest with 22 year time windows?

  2. Oh and I just noticed that the two points you list are directly lifted from the Motley Fool article you linked to.

    It would have been better journalism if you had listed those two points as coming from the article as opposed to letting a lazy reader infer that these are your sage points of advice.

  3. Always refreshing to read these articles. I absolutely agree with the line that equities will outperform cash over the next decade. USD cash is a horrible investment-one that I am personally shorting-so measured asset procurement is a better alternative.

    My one tid bit of advice for this forum is to consider incremental equity purchases, being extremely discriminatory in selecting stocks, and consider hedging strategies to minimize downside risks.

  4. Investing in indexes would have fared better in 2008 and probably 2009 as there is still a great deal of weirdness to deal with as the "Alt-A" and "Option ARM" loans experience epic failure rates.

    Buffet has been long the Brazilian Real for a while and it was doing fine until the Fed decided to throw a monkey wrench in the global business system and let Lehman fail.

  5. Thanks for the points Cuervos. Always fun to joust with you.

    And appreciate the journalism points... If you have a look at those to point you'll see that I altered them quite a bit.

    Though perhaps your point is valid since to you they appeared to be the same...

  6. Thanks for the affirmation Rob. It is amazing to me this "flight" to "quality." Cash and T-bill liquidity are the fool's way to bury their talents deep in the ground. A wise manager does not approve.


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