NEW YORK, NY (Nov. 22, 1999) -- To the best of my knowledge, Warren Buffett, the chairman of Berkshire Hathaway (NYSE: BRK.A), has only expressed strong opinions about the market's valuation levels on six occasions in the past 42 years. In the first four cases where we know the outcome, he was uncannily accurate, so investors would be wise to carefully consider his latest warning in a recent issue of Fortune (which I commented on in my columns here two weeks ago and last week). Yet I also believe that true long-term investors -- an increasingly rare breed -- should remain largely fully invested.

Incidentally, Buffett might dispute the statement that he's making a strong market call -- in fact, he takes pains to say, "I will not be predicting [the market's] next moves." But when he states that he expects stock market returns, after inflation and "frictional costs," of 4% annually for the next 17 years -- scarcely better than a risk-free inflation-indexed Treasury security -- that's a pretty strong statement.

Here is a description of each of Buffett's market calls, with the outcome:

Market Call #1

Try guessing the date of the following comments by Buffett:

"I make no effort to predict the course of general business or the stock market. Period. However, currently there are practices snowballing in the security markets and business world which, while devoid of short-term predictive value, bother me as to possible long-term consequences....

"Spectacular amounts of money are being made by those participating (whether as originators, top employees, professional advisors, investment bankers, stock speculators, etc.) in the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and the cynical.

"I believe the odds are good that, when the stock market and business history of this period is being written, [this] phenomenon... will be regarded as of major importance, and perhaps characterized as a mania. You should realize, however, that this 'The Emperor Has No Clothes' approach is at odds (or dismissed with a 'So What?' or an 'Enjoy, Enjoy!') with the views of most investment banking houses and currently successful investment managers."

No, Buffett did not write these words recently about Internet stocks or the current stock market in general -- though I suspect this is how he feels. He wrote them more than 30 years ago, in mid-1968, a time that was also characterized by a richly valued market and speculative froth around emerging technology stocks.

Less than a year later in 1969, in large part due to the lack of "really first-class investment ideas" in an "increasingly short-term oriented and (in my opinion) more speculative market," a frustrated Buffett announced his intention to retire with the following words:

"I just don't see anything available that gives any reasonable hope of delivering such a good year and I have no desire to grope around, hoping to 'get lucky' with other people's money. I am not attuned to this market environment, and I don't want to spoil a decent record by trying to play a game I don't understand just so I can go out a hero."

If that isn't a bearish call on the market, I don't know what is. And it was prescient, though slightly early: While the next four years from 1969 through 1972 were not disastrous (averaging mid-single-digit returns), Buffett maintained his bearishness, saying in early 1973, "I feel like an oversexed guy on a desert island. I can't find anything to buy." Sure enough, for all of 1973 and 1974, the Dow and S&P fell, respectively, 25% and 37% (45% from peak to trough), for a total decline of 8.7% and 11.2% over the six-year period.

Historical trivia: Buffett, of course, did not retire. When he dissolved the private investment partnerships he had been managing at the end of 1969, part of the distribution to his investors were shares in a wholly owned company he had acquired, Berkshire Hathaway. He recommended that they hold on to these shares, as he intended to. Buffett became chairman of Berkshire Hathaway and made those who were wise enough to heed his advice hugely wealthy, as Berkshire Hathaway's share price increased approximately 1,400 times from $42/share at the end of 1969 to nearly $60,000 today (that's 27% annual growth for nearly 30 years).

Market Call #2

By 1974, Buffett was singing a different tune. As Roger Lowenstein relates in Buffett: The Making of an American Capitalist, Buffett told Forbes: "I feel like an oversexed man in a harem. This is the time to start investing." Another good call, as the Dow and S&P soared 86% and 70%, respectively, over the next two years.

Market Call #3

The market stagnated from 1977-79, triggering much gloom and doom about the stock market. In contrast, Buffett, in the August 6, 1979 issue of Forbes, said:

"Stocks now sell at levels that should produce long-term returns far superior to bonds. Yet pension managers, usually encouraged by corporate sponsors they must necessarily please, are pouring funds in record proportions into bonds. Meanwhile, orders for stocks are being placed with an eyedropper.

"Can better results be obtained over, say, 20 years from a group of 9 1/2% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, at around book value and likely to earn, in aggregate, around 13% on that book value?... How can bonds at only 9 1/2% be a better buy?"

They weren't, as the next 20 years would show. Since Buffett spoke those words, the S&P has had an annualized return of 17.2% versus 9.6% for bonds.

Market Call #4

At the Berkshire Hathaway annual meeting in May 1986, Buffett said, "I still can't find any bargains in today's market. We don't currently own any equities to speak of [except for the core holdings of GEICO, the Washington Post Co., and Capital Cities/ABC]." This was in marked contrast to the early 1980s, when there were as many as 17 large-cap stocks in Berkshire Hathaway's portfolio. Buffett continued his bearishness into 1987, writing in the spring (in the 1986 annual report) that "there's nothing that we could see buying even if it went down 10 percent." We all know what happened in October 1987. Before the market correction was over, the Dow had lost nearly one-third of its value.

Market Call #5

It's too early to judge this market call with certainty, but barring a major correction in the next three years, the bull market of the 1990s may have finally confounded him. In the 1992 annual report, he wrote:

"Charlie Munger, Berkshire's vice chairman and my partner, and I are virtually certain that the return over the next decade from an investment in the S&P index will be far less than that of the past decade.... Making [this] prediction goes somewhat against our grain: We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. However, it is clear that stocks cannot forever overperform their underlying businesses, as they have so dramatically done for some time, and that fact makes us quite confident of our forecast that the rewards from investing in stocks over the next decade will be significantly smaller than they were in the last."

The 10 years prior to this statement (assuming for simplicity's sake that Buffett made the prediction at the end of 1992), the Dow compounded annually at 17.1% and the S&P at 16.2%. For the six years since then (1993-98), the figures were 19.8% and 21.6%, respectively -- and the market has continued its strength this year -- so the next three years will have to be pretty grim to validate Buffett's prediction.

Market Call #6

We'll have to wait 17 years to know how accurate Buffett's latest market call will turn out to be.


I have tremendous respect for Buffett's track record of accurate market calls. However, I have no plans to change my strategy of remaining fully invested. Why? Because despite the seeming accuracy of Buffett's market calls, every one of them has been wrong for the long-term investor.

Let's look at the long-term data. Jeremy Siegel, in his classic book Stocks for the Long Run, revealed that:
  1. In 123 rolling five-year periods since 1870, stocks had positive returns in more than 90% of these stretches.

  2. In 90% of 10-year periods, the after-inflation annual returns from stocks were at least 2.8%, and in 90% of 20-year stretches, were at least 5.3%.

  3. Over 20-year periods back to 1802, stocks have never generated less than 1.0% annual returns above inflation, and stocks have never failed to beat inflation over any period of 17 years or longer.

  4. Over five-year periods back to 1802, stocks outperformed bonds and T-bills more than 70% of the time; over 10 years, more than 82% of the time; over 20 years, more than 94% of the time, and over 30 years, 99.4% of the time (and 100% of the time since 1870).
Thus, Siegel concludes, "The upward movement of stock values over time overwhelms the short-term fluctuations in the market. There is no compelling reason for long-term investors to significantly reduce their stockholdings, no matter how high the market seems."

That pretty well sums it up for me.

-- Whitney Tilson

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