Warren Buffett: The Stock Market Is The Most Obliging, Money-Making Place In The WorldThe Acquirer's Multiple
During the 2012 Berkshire Hathaway Annual Meeting, Warren Buffett explained why the stock market is the most obliging, money-making place in the world. Here’s an excerpt from the meeting:
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WARREN BUFFETT: Yeah. We’ve run Berkshire now for 47 years. There have been several times — oh, four or five times — when we’ve thought it was significantly undervalued.
We saw the price get cut in half at least four times — or roughly in half — in fairly short periods of time.
And I would say this: if you run any business for a long period of time, there are going to be times when it’s overvalued and sometimes when it’s undervalued.
Tom Murphy ran one of the most successful companies [Capital Cities] the world has ever seen, and in the early 1970s, his stock was selling for about a third of what you could have sold the properties for.
And, you know, Berkshire, back in 2000/2001, whenever it was that I wrote in the annual report that we were also going to repurchase shares, was selling at what I thought was a very low price, and we didn’t get any repurchase.
But that — stocks — the beauty of stocks is they do sell at silly prices from time to time. That’s how Charlie and I have gotten rich. You know, Ben Graham writes about it in Chapter 8 of the Intelligent Investor.
You know, next to — well, Chapters 8 and Chapters 20 are really all you need to do to get rich in this world.
And Chapter 8 says that in the market you’re going to have a partner named “Mr. Market,” and the beauty of him as your partner is that he’s kind of a psychotic drunk — (laughter) — and he will do very weird things over time and your job is to remember that he’s there to serve you and not to advise you.
And if you can keep that mental state, then all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, that he is making lots of mistakes, and he makes them for all kinds of weird reasons.
And all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.
So it’s built into the system that stocks get mispriced, and Berkshire has been no exception to that.
I think Berkshire, generally speaking, has come closer to selling around its intrinsic value, over a 47-year period or so, than most large companies.
If you look at the range from our high to low in a given year and compare that to the range high and low on a hundred other stocks, I think you’ll find that our stock fluctuates somewhat less than most, which is a good sign.
But I will tell you, in the next 20 years, Berkshire will someday be significantly overvalued, and at some points significantly undervalued.
And that will be true for Coca-Cola and Wells Fargo and IBM and all of the other securities that — I don’t — I just don’t know in which order and at which times.
But the important thing is that you make your decisions based on what you think the business is worth.
And if you make your buy and sell decisions based on what you think a business is worth, and you stick with businesses that you think — you’ve got good reason to think — you can value, you simply have to do well in stocks.
The stock market is the most obliging, money-making place in the world because you don’t have to do anything.
You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller, and you don’t — and it changes every day, and you’ve got lots of information about most of those businesses, and you don’t have to do anything.
Compare that to any other investment alternative you’ve got. I mean, you can’t do that with farms.
If you own a farm and the guy has the farm next to you and you’d kind of like to buy him out or something, he’s not going to name a price every day at which he’ll buy your farm or sell you his farm, but you can do that with Berkshire Hathaway or IBM.
It’s a marvelous game. The rules are stacked in your favor, if you don’t turn those rules upside down and start behaving like the drunken psychotic instead of the guy that’s there to take advantage of it.
CHARLIE MUNGER: Well, what’s interesting about this place is I think we’ve had a lot more fun and we got rich enough so we bought businesses and stocks to hold instead of to resell. It’s an enormously more constructive life. So as fast as you can work yourself into our position, the better off you’ll be. (Laughter)
WARREN BUFFETT: And you should be very encouraged by the fact he’s only 88 and I’m only 81. Just think, it may take you a little while. (Laughs)
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