You may have heard about Warren Buffett’s op-ed piece in The New York Times titled, Buy American. I Am. In it, Mr. Buffett strongly counsels against seeking refuge in the “safety” of fixed income and start buying stocks as there is widespread fear and panic:
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
It is very rare for Mr. Buffett to write an article in a major newspaper or magazine on the level of the stock market. While the timing of his latest piece remains to be seen, the last time he publicly took an opinion on the stock market, his timing was impeccable.
In late 1999, investors were enthusiastically bidding up stocks to sky-high levels. It wasn’t just the dot-coms, which hadn’t earned a dime in their entire existence, going public and fetching multiples of their IPO price. Many blue-chip, growth stocks were trading at unheard of multiples. Mr. Buffett, written off as a fuddy-duddy who didn’t “get” the new economy, wrote this article in Fortune magazine making a strong case for lower equity returns:
Let me summarize what I’ve been saying about the stock market: I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like–anything like–they’ve performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate–repeat, aggregate–would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.
He further reminded investors the sorry history of new-fangled industries destroying their wealth:
Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact–though the picture would have improved since then–the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough–I owed this to future capitalists–to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
Within a few short months, the dot-coms bombed and equity markets began a long, slow, painful slide that finally ended in 2002. Surely, investors who read that article would have wished they had taken Mr. Buffett’s advice (I read that column and was stupid enough to buy Yahoo! shortly thereafter). Could this time be any different?
