Buffalo, NY – What is most unsettling to the markets is uncertainty. The reason for this is that the market can provide fairly accurate matches on the value of securities when all relevant facts are known. In order to do its best pricing, markets also need to know that the present, as well as the future, is reasonably knowable. Markets do not like much change in the general outlook of things, as it needs to price all of the factors into its bids and offers.
At this point in time, the market is on overload concerning uncertainty; and this is reflected in some of the erratic pricing that we have seen in the past few days. For example, Berkshire Hathaway is in our opinion, one of the most solid companies out there. Its chairman, Warren Buffett is universally acclaimed as not only the wealthiest investor in the world, but also one of the most savvy. This past week, the shares of Berkshire sank by nearly twenty percent over the course of a couple of days.
After seeing this type of price compression we have to ask the question, has anything materially changed at Berkshire to warrant a 20% haircut in their share price? From our perusal of the news, there was no economic reason for the price to be hit but it was. This is an example of the market not acting as a rational pricing mechanism, but being unnerved by uncertainty, and pitching prices that do not accurately reflect the economic value of a stock.
Furthermore, over a month ago, Buffett penned a piece in the New York Times entitled, "Buy American -- I Am" in which he told us how he is buying the shares of American corporations in his personal investment account, which was totally invested in U.S. government securities prior to this time.
When the most successful investor of our time publishes the fact that he is buying the shares of beaten down stocks for his personal account, you would think that this is the first tip in your lifetime that you can take to the bank. After all, no one has ever said that Buffett is anything but the most astute evaluator of value extant.
In the article, he even gave us the counsel that made him the richest person on Earth, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
So with this kind of a heads up, what would you expect to see? The market attracting buyers and paying homage to one of the greatest investors the planet has ever seen? Apparently not. Since the publication of Buffett's article, the market has slid an additional 20% through Thursday November 20th; and the shares of Buffett's Berkshire, for being I won't say optimistic but realistic about market valuations, the market took the shares of Berkshire down by a tad more than 30%! As they say, no good deed goes unpunished.
One of the amazing things about Buffett is that he has been so profitable over time not because he has the snappiest software; I don't even think he owns a calculator. The reason is, that he has been able to distil his investment acumen into a few principles that he practices religiously. In addition to his advice about being greedy when others are fearful, he also describes his optimal time horizon for holding an investment as "infinite."
At a time like this, when there is a real temptation to time the market, we continue to believe that Buffett has gotten it right. Wealth creation is a long-term endeavor. It causes us to go against our best instincts and to commit capital when it seems like the world is most troubled. The reason most people are not wealthy is not that they do not know Buffett's principles, it is that they are so hard to follow.
Anthony Ogorek is principal of Ogorek Wealth Management in Williamsville.
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