Warren Buffett: Why Smart People Lose Money In Stocks | University of Georgia 2001

[Transcript]

AUDIENCE MEMBER: I’m just wondering, there's a lot of differences between the recent boom and bust in the stock market and the one in the 1920s, but there are also a lot of similarities and those similarities are allowing people to draw the conclusion that stock prices will be depressed for some time to come. Where do you disagree and agree with that conclusion?

WARREN BUFFETT: Well—the whole century is quite interesting. If you take the 20th century, it was an unbelievable century for the United States. The GDP per capita—and that’s the way to think of it is per capita. Sometimes they talk about our GDP versus Europe’s, but if their population is the same every year and ours goes up 1%, you've got a—you know in the end, you’ve got to have a divisor as well as a numerator.

And so—GDP per capita in the 20th century in the United States went up 610%. Actually, qualitatively, it went up far more than that because you can't really measure, you know, certain things in medicine or whatever it may be in improvements. But, just on a quantitative basis, it went up every single decade—including the decade of the 1930s.

So here you had 100 years when, basically, the U.S. citizenry was getting—was improving their lot decade by decade by decade. The 1930s, it was up 13%. The best decade was World War II, the 1940s, it was up 36%. The worst decade was the first World War—so you get—sometimes the analogies, you know, you can get in trouble on analogies—but, in any event, it was a huge period.

Interestingly enough, there were six big periods in there for the stock market in both directions. There were three big bull markets. From 1900 to 1921, the Dow went from 66 to 71. Less than a 10% move in 20 years. Less than half a percent a year. You got dividends too, but a half a percent—so it didn't move.

From 1921 to 1929, as you point out, it went from 71 to a high of 381 in September of 1929. It went up 500%. Well, obviously, the well-being of the country didn’t go up 500% during that period. And the well-being of the country went up a whole lot more than 10% during that first 21 years (1900-1921), so you’ve got this very uneven development.

Then, from September 1929 until the end of 1948, the Dow went from 381 to about 180. It was cut in half. That was eighteen long years. And yet the per capita GDP was moving right up during this whole period, so the economy was doing fine. From 1948 to 1965, the Dow went again from about 180 up to close to 1,000. Again, 5 for 1—which was far outstripping it. From 1965 to 1981, the Dow went down literally. While, again, per capita GDP (kept going up). And then we’ve had this last period where it’s gone up terrifically. If you take the whole hundred years, it went up 180 for 1. Every $1,000 became $180,000.

But 43-and-three-quarters years were those three big, huge bull markets. 56-and-a-quarter years were periods of stagnation. All in an economy that was doing fine, you know, year after year after year. 56-and-a-quarter years, net, the Dow was down a couple hundred points during that period. And the other 43-and-three-quarters years made up the rest of this move from 66 to 11,000-something on the Dow.

So you say to yourself, “How could it be that you can have a country who was doing better and better and better and better—so the citizens were living, every generation was living better than the one that preceded it—but you had these huge changes?” Big gains a few times, long periods of stagnation. Twenty years, I mean that’s a long time to do nothing.

The answer is that investors behave in very human ways, which is they get very excited during bull markets and they look in the rearview mirror and they say, “I made money last year. I’m going to make more money this year, so this time I’ll borrow.” You know, or the neighbor says, you know, "I wasn’t in last year when that neighbor who’s dumber than I am made a lot of money, so I’m going to go in this year.” So they’re always looking in the rearview mirror. And when they look in the rearview mirror and they see a lot of money having been made in the last few years, they plow in and they just push and push and push on prices.

And when they look in the rearview mirror and they see no money having been made, they just say, “This is a lousy place to be.” So they don’t care what’s going on in the underlying business. And it’s astounding—but that makes for huge opportunity. Just huge opportunity.

I mean, I’ve lived through what we have—in an investing sense about half of that period. And I’ve had that long period of stagnation. From 1948—I mean from 1965 to 1982, seventeen years. I wrote an article for Forbes in 1979. I just said, “How can this be?” Pension funds in 1970 put 100-and-some percent of their new money in stock because they were wild about stocks. Then they got a lot cheaper and they put a record low in, 9% of their net new money in 1978 when stocks were way cheaper.

People behave very peculiarly in terms of their reactions because they’re human beings. And they get excited when others get excited. They get greedy when others get greedy. They get fearful when others get fearful. And they’ll continue to do so.

And you will—you know—you will see things you won’t believe in your lifetime in securities markets. And the country will do very well over time, but you will see these huge waves. And if you can stay objective throughout that, if you can detach yourself temperamentally from the crowd, you’ll get very rich. And you won’t have to be very bright. I mean it—I'm sure you are, but you want—you know—it just—it doesn't take brains. It takes temperament. It takes the ability to sit there and look at something.

When I started out in 1950, I would go through and find things at 2x earnings and they were perfectly decent businesses. And people wanted jobs at those companies. And everybody knew they were gonna be around, and they wouldn’t buy them at 2x earnings. And that’s when interest rates were 2.5%.

You know, I went to the—I started selling securities when I was 21 and Kansas City Life Insurance Company happened to be a fairly prominent company in Omaha. And the policies they sold you—if you were buying life insurance from them—had a built-in assumption of 2% interest. The stock of Kansas City Life was selling at less than 3x earnings. You were getting 35% if you bought the stock. No question about the soundness of the company. I went to the local agent. I thought, "Hell, I oughta be able to sell him a few shares of stock. I mean, the guy'll understand it. He’s got his whole life invested in this company." I went to the local agent, who had been with them for 20 years. His name was Moose. I said, “Mr. Moose —I said, you know, you’re selling these policies with 2%. You may even have a few members of your own family and you can buy into this company, whose paycheck you depend on every month and whose future your beneficiaries of these life policies depend on and who you’re selling them you know, a 2% investment on, and you can get 35% on your money.” And he said, you know, “Stocks aren’t any good.” And I couldn't sell the guy, you know, I was a lousy salesman—I mean, well, you have to start with that but—it just blew me away. It blew me away. I thought—sometimes I used to wonder if I was nuts.

You know—but those things—the same thing happened, I mean in 1964, the Dow closed at 864. At the end of 1981—seventeen years later, it closed at 865. It moved one point in 17 years. Now, that's not a big move. And that you can't believe the—how discouraged people were by that—during that period. But, you know, people were living better. So things can go on a long time that don't make sense and—but they do come to an end. I mean, the internet thing—I mean, you had these companies selling for many billions of dollars that had—no really—practically no prospects of making any money. That’s a bubble.

But Herb Stein, one time, said, “Anything that can’t go on forever will end.” Now, that seems pretty—(Laughter)—but think about that. And particularly, think about it next time you're trying to do something just because the stock has gone up a whole lot, you know, and your neighbor has made money or something. You've got to be—you just have to sit and think objectively and think about, “Would I buy this whole business?” It's an internet company, it’s got 100 million shares out and it’s selling at $100, that’s $10 billion. Is it worth $10 billion? If it’s worth $10 billion, it’s got to be able to give you, you know, $700-800 million next year. And if it doesn’t give you $700-800 million next year, it has to give you maybe 10% more than that the year after and continue to be. There aren’t a lot of businesses that can do that. And people just go crazy. And, of course, it’s fun. 

I mean, it's—you know, it's like that sign they put in broker's offices that says, “Avoid hangovers. Stay drunk.” You know, I mean—(Laughs)—it’s just so much fun to keep playing, but you’ve got to do sensible things to get good results.

Source: https://youtu.be/2a9Lx9J8uSs?si=hvfkap4Rvr_pCtVY

 

[YAPSS Takeaway]