- Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it's going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it's correct--will have implications for the long-term results to be realized by American stockholders.
Let's start by defining "investing." The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.
How can you miss the money quote? Below is what the article is famous for: 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. Thing of it is, it's a message in a bottle from another time. Reading Buffett from 1999 to figure out what the market is going to do is like reading Moltke the Younger to figure out what's going to happen in Libya. Buffet is an Intrinsic Theory investor. If it makes this much money, it's worth this much money now. If it will make this much money in the future, it's worth that much money, factoring in the risk of it not making that much money and the risk of putting it in a bank somewhere. Buffet made his bones when stock prices simply didn't matter - his paradigm is See's Candies, which was a local outfit that made good candy and had great profits and mostly what he did was increase the amount of See's Candies made which increased the amount of profits. If you were to point to an Econ 101 paradigm of entrepreneurialism, Buffett would be Choice 1. Now read that quote again. America’s Largest Airlines Received Benefits Worth US$71.48 Billion, New Study Shows Buffett ain't wrong - Airlines are a low-margin business. But United alone has a $44b cushion. And with that cushion they generated FOUR BILLION DOLLARS in profits! Fuckin' A! What a business model! Open a lemonade stand, lose $10, get $11 from mom'n'dad, declare a $1 profit. From a bailout perspective alone, American Airlines has cost every man, woman and child in the United States about $134. From a capitalist perspective, you're a dumbass if you don't own American Airlines because it's the only way to get any of that money back. $11 a share in 2015; you'd only need about $550 in AA stock to get back to even from where your government put you. Ain't capitalism grand? Intrinsic value theory is nice. It makes sense. You can point at it and go "this is why we don't like communism - look at all the opportunity." And if you're Warren Buffett, and can buy See's Candies for $25m in 1971, capitalism works out well for you. But right now, "capitalism" is a bunch of AI clusters swapping $100k blocks of American Airlines stock a thousand times a second in a dark pool nobody can see without ponying up billions so that they can arbitrage the fact that your link is 3 nanoseconds slower than theirs. Travis Kalanick made $9b by deciding cab drivers were paid too much and taking $25b of other people's money to make it a reality. Uber managed to lose three dollars for every two dollars they made while simultaneously paying their drivers less than the IRS allows them to depreciate their cars. This is the system Buffett knows.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.
The Tinker Bell approach--clap if you believe--just won't cut it.
Also just as an aside and a hat tip to the common knowledge game driving every single thing about investment, keep your eye on Buffett and stock prices: So. 1981-1999 beats the best stock growth we've ever seen. 2009-2018 beats the growth from 1981-1999! Stocks are fuckin' amazing. We'll just ignore that dump from 2007-2009 (14,000-7000 - 50% retraction) and we won't pay attention to Nasdaq (which depending on where you pick has gone from 1376 to 1400 in 8 years or 1500 to 8000 in 10). STOCKS ARE GROWTH. EQUITIES ARE JESUS. Crypto is anthrax and a fool and his money are soon parted. The Dow peaked at 381 on September 3, 1929. It troughed at 41 on July 8, 1932. That's an 89% reduction in value. Bitcoin peaked at $19,981 on Dec 13, 2017. It troughed at $3128 on Dec 6, 2018. That's an 84% reduction in value. But remember - stocks are patriotic and crypto is for hackers and child molesters. The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you'd bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.