Warren Buffett recently emphasized the importance of viewing stock investments as buying businesses, not speculating on market fluctuations. In an interview with CNBC, Buffett cited an example from 1932 when General Motors had 19,000 dealers but sold only a fraction of a car per dealer during tough economic times. He pointed out that such conditions often present great buying opportunities.
Buffett argued that market predictions cannot be made through newspapers or daily speculation. Instead, investment success comes from assessing the value of future earnings over decades. He highlighted the irrationality of frequent stock decisions, urging investors to focus on fundamental value rather than short-term market movements.
“If you get your money’s worth in terms of future earning power over the next 10, 20, or 30 years, you’ve made a good investment,” Buffett said. “And you can’t pick them from day to day. I couldn’t do that.
Well, I haven’t met anybody yet that knows how to do it.”
Buffett’s insights serve as a reminder that successful investing requires patience and a deep understanding of the intrinsic value of one’s investments. Despite the market’s significant rally, with the S&P 500 up 36% in the last 12 months, investor nervousness is understandable. The Shiller Cyclically Adjusted P/E (CAPE) Ratio is currently at a level it has only visited four times since 1871.
However, using the CAPE ratio to predict crashes is not particularly effective, although it has a reasonable track record in predicting future returns. Notably, investors at Berkshire Hathaway have been holding significant cash reserves and reducing positions in key stocks like Apple and Bank of America.
Buffett’s investment philosophy explained
Historically, significant cash reserves have been stockpiled before major market declines, which some interpret as a signal that the market may be overvalued. Eventually, the stock market will experience another crash. Speculating on when it will happen through indicators like CAPE and other similar metrics is less critical than focusing on identifying high-quality growth companies.
Having patience, discipline, and perspective is essential. As always, it’s advisable to stay grounded in quality investments and maintain a solid investment strategy rather than getting distracted by market noise. Even if a bubble and a crash occur, it might have its perks.
Bubbles can attract resources to important projects that would not make sense to fund or work on under a normal cost-benefit analysis. They pull the future forward by concentrating tremendous amounts of financial and human capital on very specific visions of the future. As painful as a crash can be, it also has its advantages, especially for investors with decades still to come.
Technological progress is bred from creative destruction, and crashes provide better prices to accumulate more shares. If you’re in it for the long haul, crashes are usually painful in the short term and rewarding in the long run. Just look at the ASX 200 Index from the COVID crash.
It fell 32%, but investors are now up 18% from the pre-pandemic high. That’s why some investors are fine with a stock market crash. And maybe, after reading this, you are, too.
