Post of the Day
April 11, 2000

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Berkshire Hathaway

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Subject:  "I'm feeling better," says Value.
Author:  EliasFardo

At a press conference this morning, Value insisted that regardless of reports to the otherwise, he is still alive and well. Looking fit and tanned, Value opened the conference with a prepared statement.

Value: There have been many times in the past when I have been forced to reintroduce myself to the public. At those times I usually quoted Mark Twain who once quipped, "The report of my death was an exaggeration." Today I would like to also quote from a more contemporary comedy group, Monty Python, and say, "I'm not dead yet." In fact, I am feeling better than ever.

Today, I want to make two specific points and then open the conference for questions. First, value is. It exists. What I mean by value is a determinable worth independent of price. To me, it is embarrassing that I should feel compelled to call a news conference to make a point that is clear on its face. I feel like a NASA scientist defending his belief in the existence of gravity. But when I read the comments of the financial pundits, I discover that this self evident idea is, for some inexplicable reason, in dispute. And even worse than that, even though I have not been closely following the price mania in the stock market, this lack of belief in value's existence seems to have carried over into the actions of many investors; enough investors anyway to dictate the current valuation of almost all common stocks. So I stand before you today to state, uncategorically, that I, Value, exist.

Secondly, I want to remind the public that value is not just a philosophical idea, but a concept that can be used for profit in the investment process. I leave it to the individual investor to find the methods that work best for him; the ways to employ value are varied and vast. But what I want to tell people today, especially to the newcomers to the investment process, is that price is not value and value is not price. And to confuse the two is detrimental to your financial wellbeing.

Questions?

Reporter: You mention that you feel the need to reintroduce yourself. Does that mean that you have been intentionally absent?

Value: In a way, yes. I have known Momentum for much longer than any of you have. We go way back. I have noticed a difference between the two of us. I try to work my will every day, but Momentum is an opportunistic fellow; he only strikes when the timing seems exactly perfect for his brand of madness. Therefor, when Momentum is acting out he has all this stored energy to project, and he does so with wild abandon. He will work himself to exhaustion, flame out, and sanity will return to whatever market he was involved with.

The lesson I have learned from the past is that when Momentum is obsessing, I need to step aside, for I will not be heard. So I decided that I can be here and be ignored, or I can be gone and be ignored. The result is the same. So I took a vacation.

But there is another reason as well. I quoted from Mark Twain earlier. He also said, "A man who carries a cat by the tail learns something he can learn in no other way." So I decided to just let investors lug that cat around by its tail for a few months. I believe that investors need the opportunity to experience the full consequences of their actions. Sometimes that is the only way to learn a lesson. If nothing succeeds like excess, let us have excess.

Reporter: What are those full consequences?

Value: Momentum investing actually is just Greater Fool theory in disguise. When investors buy a security not because they want to enjoy the profits from its assets, products and services, but simply because they think the price will be higher tomorrow than it is today, they are simply hoping that someone more foolish than they will bail them out. What many eventually learn is that they are the greatest fool of all.

I witness stockholders claiming that they own a business that has many wonderful products and services that will be in increasing demand for many years. And all of that may be true. But at the same time they are happily ignorant of the market capitalization of this wonderful enterprise. Is it $100 million, $1 billion, $10 billion, $100 billion? They don't know or care. So unsustainable, unreasonable expectations occur until Momentum eventually becomes exhausted and the stock price crashes. Some people can learn that lesson in no other way.

Reporter: Why are you returning now?

Value: There is a zen saying, "When the student is ready, the teacher will appear." I had a growing feeling that people either were or soon would be experiencing enough pain to become teachable. I believe that day is today.

But even I can take only so much. The confusion between price and value had become so rampart that I was becoming very annoyed. For instance, when I heard an investor insist that he was a value investor because the current price was less than what he expected next week's price to be, I knew something had to be done. For those reporters among you who see no problem with the logic of this particular investor, I am here for you too.

Reporter: Would there be any truth to a claim that you are coming back because people were laughing at you?

Value: Whoever they may be, I have been laughed at by funnier people than them. They can laugh at me and shift all the paradigms they desire. That doesn't bother me at all.

Reporter: You said in your opening remarks that you would leave it to each investor to use value in his own way, but surely you have some ideas on what investors should do.

Value: The way I see it there are two different ways to determine when a particular security should be purchased or sold. The investor can compare today's price to today's value, or today's price to tomorrow's price. Once an investor accepts that a security has a determined worth independent of price, and computes such worth, he has an amount that can be compared to today's price. An exact determination of value may not be realistic, but an estimate can be had. And then armed with this estimate of value, the investor can act. What the evidence does show however is that tomorrow's price is unknowable. So the investor has a choice: he can make decisions based on something that is at least subject to estimation, today's value, or he can make decisions based on something that is unknowable, tomorrow's price. To me the choice seems obvious.

As an aside, the argument I have heard that value is just another word for price and therefor has no separate existence, is a polemic that borders on nihilism. And for people who would base decisions on something like future price, which is entirely unknowable, nihilistic arguments represent very strange reasoning indeed.

Reporter: In what way is this argument nihilistic?

Value: Nihilism is the denial of the existence of any basis for knowledge. When someone insists that the worth of something is entirely dependent on market price, they are denying that other forms of inquiry, such as the use of reason and logic, will revel any valid information. Whether they are aware of it or not, they are making an epistemological argument.

And all kinds of things have an existence separate from prices. As far as I know, there is not a quote for sunsets, clouds or a mother's love for her child, yet these things are real; they exist; they have value.

But if you want to hold the discussion to financial assets, let me give the following example. Imagine that Michael Jordan is six years old and his family is in need of money. So his parents make you an offer. They will sell you half of Michael Jordan's future earnings from playing basketball and making product endorsements for only $1,000. Now, Michael is only six and his oncourt potential may or may not be evident, so you might protest that $1,000 is to much and make a counter offer for $500. What if they accept? If value has no existence separate from price, does this mean that the true present value of half of Michael Jordan's future earnings from playing basketball was indeed worth only $500? Or what if they don't accept. Does that mean that his future earnings are worthless. Today, we know that such a conclusion is nonsense. Yet to argue that something is only worth what someone will pay for it demands such a conclusion.

Reporter: In your opening remarks you said that you have not been closely following the mania. But surely you have some opinion on the internet stocks that make up most of this mania?

Value: When I say I am not following the mania closely, what I mean is that I am watching it obsessively. My thoughts on the internet stocks is very simple. I believe that to succeed, a business needs products, sales and earnings; and most internet stocks have all but three of those things.

Reporter: What have you been doing while away?

Value: Getting sun and playing tennis. I found an excellent doubles partner in Mr. Market. Sometimes, however, Mr. Market is not a desirable partner. He can be manic and bouncing off the ceiling, or he can be so depressed that he has to look up to see bottom. But when he is balanced, we make a killer team. I have grown to like Mr. Market a lot. He is actually the one that should be holding this press conference.

Thank you.

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