Dave Sather’s Money Matters
As I sifted through mountains of notes from the Berkshire Hathaway annual meeting, I returned to a statement made by Warren Buffett’s partner, Charlie Munger. Munger said he’d be happy if Berkshire’s stock did not trade publicly and were instead valued just once a year.
To the frenetically charged Wall Street crowd living on nothing but Red Bulls, the thought of not trading is downright heresy. This is especially true in light of Facebook’s recent IPO. However, this thought is not unique to just Buffett and Munger.
Consider some of the great private companies in Texas like HEB, Blue Bell Creameries, Buc-ee’s and Academy. These businesses are all large enough to trade publicly. However, the owners recognize it is better to keep them private.
Sure, maybe they miss out on a short term trading profit–but instead they maintain their focus on the long term profitability without the constant annoyance of Wall Street. None of the owners of these businesses are sitting at their desk hoping their stock price increases by a quarter point so they can day trade in and out. They are too busy focusing on the long term–which is where the real value is created.
Buffett and Munger have long said that the approach taken by much of Wall Street has turned our financial markets into nothing but casinos.
Knowing this, they recognize the public financial markets can, and will, do very strange things. Buffett added that in the time that he and Munger have been running Berkshire, their company’s stock price has been cut by at least 50% on four different occasions. Although the stock price may have fallen by 50% it did not mean that Berkshire was any less competitive or profitable. It just meant that people were overreacting to the news of the day. Anyone who sold while the stock was down made a tremendously terrible decision–while those who bought in at depressed prices may have hit a true home run.
Therein lies the beauty of stocks–they often sell at silly prices.
Buffett’s mentor, Ben Graham, used to refer to the stock exchanges as Mr. Market. Munger added that in dealing with Mr. Market you have to remember that he is a “psychotic drunk.” Given this, although Mr. Market will offer up a variety of prices—the smart investor knows he is not there to advise you.
Mr. Market will make many mistakes and offer overly optimistic prices or is unnecessarily pessimistic. It is up to the individual investor to take advantage of these mistakes.
When dealing with Mr. Market Buffett stated that what matters most are your facts and your reasoning. He then added that over the next 20 years, Berkshire stock will be both significantly overvalued as well as undervalued. Therefore, the investor needs to make decisions based upon what a business is worth. Buffett also added that a successful investor will continue to buy stocks consistently over time.
As I pondered the plethora of electronic trading systems available today, it reminded me that just because you can trade stocks on a frequent basis, does not mean that you should. Ill-informed investors have repeatedly shown they buy at the wrong time and sell at the wrong time as they are led astray by Mr. Market’s psychotic behavior.
The next time you feel the itch to time the market or trade in or out of a security—remember that the true value of any company is the compilation of its earnings over long periods of time. Furthermore, whether you buy one share or one hundred shares—you should act as if you own the whole company. Given this, successful investors like Buffett and Munger continue to focus on the long term profitability of a company and learn to ignore Mr. Market’s psychotic rants.
President, Sather Financial Group