Berkshire Hathaway 2013 Annual Report Download - page 21

ŠMy two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market
might do in the years immediately following – 1987 and 1994 – was of no importance to me in making
those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the
chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks
provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm
or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations
placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my
property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices
varied widely over short periods of time depending on his mental state – how in the world could I be other than
benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would
buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners
cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest
rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet,
important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become
frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an
implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the
unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic
and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if
he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a
euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my
farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a
solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So
why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them
might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was
going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
************
When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very
similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate
an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a
reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate
future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked
together, we have never foregone an attractive purchase because of the macro or political environment, or the views
of other people. In fact, these subjects never come up when we make decisions.
It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of
it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that
occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a
desire to be where the action is.
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