Chapter 11 10. Warren Buffett: Finding the Elephant in Crisis

Warren Buffett, chairman and CEO of Berkshire Hathaway, is known as "the only remaining business leader and investment guru of our time." On August 30, 1930, Warren Buffett was born in Omaha, Nebraska, USA. Since he was a child, he has shown outstanding talent in financial management. He started doing business when he was 5 years old. The first stock, these stories seem to be a portrayal of his life. In 1950, Buffett applied to Harvard University and was rejected. He was admitted to the Business School of Columbia University and studied under the famous investment theorist Benjamin Graham.Graham opposed speculation and advocated evaluating stocks by analyzing factors such as the company's profitability, assets, and future prospects.He taught Buffett a wealth of knowledge and know-how, and the genius Buffett became Graham's favorite student, and the values ​​taught by Graham have also become the values ​​that Buffett has achieved throughout his life.

After leaving school, Buffett started his legendary life as an investment career.He first established a partnership company similar to a private equity fund with his partners. He has been in the U.S. stock market for many years, and then established Berkshire Corporation, which is dedicated to investing in company value judgments. , Coca-Cola, General Dynamics, etc., a series of investment industry myths.From 1965 to 1994, Buffett's stock increased in value by an average of 22.9% per year, which was 12% higher than the average Dow Jones index in the United States. An intuitive example is: if someone handed over $10,000 to Buffett's company in 1965 , By 1994, Buffett will return him $9 million in return.And Buffett's company also grew rapidly during this period. During the 42 years from 1965 to 2006, the average annual growth rate of Buffett's Berkshire's net assets reached 21.4%, with a cumulative increase of 361,156%. The average annual growth rate of the component companies is 10.4%, and the cumulative growth rate is only 6479%.

In the vicissitudes that Buffett has experienced, there has been great progress in human society, but it also included wars and turmoil in the world.At least 4 economic crises, 2 oil crises, etc., as well as countless social turmoil, depict the advent of a great era, and in this era, the life of the legendary Warren Buffett.The reason why Buffett can survive these stock market disasters is not because he is so magical, but because of his long-term and firm value investment philosophy of holding great companies. Opinion: We also have fear and greed, but we are fearful when others are greedy and greedy when others are fearful.

This is one of Buffett's most fascinating experiences, just as the glory of a company often breeds the seeds of destruction.In fact, Buffett's "stock god" has won a lot of success, and most of these successes came during the depression period. When the stock market crash comes, it is a disaster for most people, but Buffett will ask: Then why don't you Withdrew before the stock market crash? background of the crisis On the way for Buffett to become a "stock god", there were three stock market crashes that successfully shaped Buffett's myth, and also conveyed Buffett's practical philosophy based on values.

The first time it happened was in 1968.At that time, the stocks of Buffett's partnership company achieved the best performance in history. They increased by 59% that year, while the Dow Jones index of the United States only increased by 9%.At that time, the U.S. stock market was booming all the way, and the situation was very good, just like the harbinger of a bull market, but just as the employees were about to fight hard, Buffett notified his partners that he was going to retire!This news is puzzling. Although Buffett was not as famous as he is now, he had already established a reputation in the investment field. In the confusion of everyone, Buffett gradually liquidated almost all the stocks of the partnership company.

However, the U.S. stock market seemed to be playing a joke on Buffett this time. After Buffett retired, it continued to rise strongly until the end of 1968. Buffett watched quietly, motionless.Half a year later, something happened that made other investors who did not withdraw from the market regret it. In June 1969, the U.S. stock market took a sharp turn, which gradually turned into a stock market crash.By May 1970, each stock had fallen by more than 50% from the beginning of the previous year. This bad situation lasted for a long time. From 1970 to 1974, the U.S. stock market was like a deflated ball, lifeless. Continuous inflation and low growth made the U.S. economy enter a period of "stagflation". For a period of time, Buffett was also as calm as water. He waited until 1974 when U.S. stocks really fell to the bottom. Investors were pessimistic and no one dared to sell easily.At this time, Buffett re-entered the rivers and lakes in high spirits, attacking cities and conquering land as if he had entered the land of no one. Amidst the pessimistic voices of the market and everyone, Buffett saw a lot of low-priced and high-quality stocks, because he has always firmly believed that behind the stocks, It is a company, and behind the company is value. Following value investment rather than speculation is the fundamental principle of stock speculation.Buffett said: "It is very stupid to own a stock and expect it to rise next week. Even if the chairman of the Federal Reserve secretly tells me the monetary policy for the next two years, I will not change any of my actions."

The same thing happened again in 1987, only this time on an unprecedented scale. From 1984 to 1986, the U.S. stock market continued to soar, with a cumulative increase of 2.46 times. The Dow Jones Index rose from less than 1,000 points to an astonishing 2,258 points.But just when people were intoxicated with the joy of the stock market rising continuously for five consecutive years, another stock market crash came. On October 19, 1987, which was the first Black Monday in history, the Dow Jones Index fell 508 points in one day, a drop of 22.6%. The stock market plummeted, and Buffett's Berkshire shares were not spared.99% of Buffett's personal wealth is in the stocks of Berkshire, a listed company he controls.Buffett lost $342 million in one day of the plunge.In just one week, Berkshire's stock price plummeted by 25%. What should Buffett do?The facts are astonishing.At the time of the plunge, Buffett may be the only one in the United States who does not pay attention to the collapsing stock market from time to time.There is no computer or ticker in his office, and he doesn't watch the ticker at all.The whole day, he stayed quietly in the office as usual, making phone calls, reading newspapers, and annual reports of listed companies.Two days later, a reporter asked Buffett: What does this stock market crash mean?Buffett's answer is only one sentence: Maybe it means that the stock market has risen too high in the past.

Buffett did not inquire about the news in a panic, nor did he sell stocks in a panic. He was very calm in the face of a sharp drop, a sharp decline in his wealth, and a sharp drop in his heavily held stocks.The reason is simple: he firmly believes that the listed companies he holds have long-term sustainable competitive advantages, good development prospects, and high investment value. Normality will return, and the share price of the company in which he holds a stake will eventually reflect its intrinsic value. In the future, Buffett's words about the stock market crash will continue to be cited as classics. He said: "The sudden outbreak of the two highly contagious epidemics of fear and greed will always appear again and again in the investment world. The timing of these epidemics is different. Unpredictable. The serious deviations in market price and value caused by them are equally unpredictable in both duration and degree. Therefore, we will never try to predict the coming or going of either situation of fear and greed. Our The goal is fairly modest: we just want to be fearful when others are greedy and greedy when others are fearful."This concept has become the best talisman for Buffett's success. In the process of becoming a stock god, he was described as a person who can capture "rare fast-moving elephants".

Viewpoint: Don't catch a falling knife, but wait for a real investment opportunity.Because you are eager to buy bottoms, it is very likely that what you get is a falling knife, and what you grab is often the blade, not the handle. Buffett's investment is an investment based on value judgments, which he likened to a knife handle.When the stock market changes drastically, many people's first reaction is to "buy the bottom", but when faced with undervalued stocks, Buffett believes that what he grasps may not be the handle of the knife, but the edge of the knife. For this reason, Buffett has set himself a Two rules: do not invest in industries that you are not good at, and stick to your own ideas.

background of the crisis Buffett still has two principles for avoiding crises. One is to never do things that he is not good at. Since 1995, the United States has entered a big bull market again. From 1995 to 1999, the U.S. stock market has risen more than 2.5 times, which is an unprecedented big bull market. Among them, the main force driving this round of market is the strong performance of Internet and high-tech stocks . But this round of gains has nothing to do with Buffett. During the period when Internet and high-tech stocks soared, Buffett continued to firmly hold the stocks of traditional industry companies such as Coca-Cola, American Express, and Gillette. The result of his persistence was 1999. , The S&P 500 Index rose 21%, but Buffett's performance was only 0.5%. Not only did he lose to the market, but he also lost very badly. This was the worst year for Buffett to lose to the market.

So at the 1999 annual general meeting, Berkshire shareholders accused Buffett one after another. At the same time, almost all newspapers and magazines were saying that Buffett's investment strategy was outdated.Buffett has become the center of the storm. In fact, this is also the main theme of Buffett's life, but Buffett will never be overwhelmed by these.At that time, Buffett's reason was very simple. Because he couldn't understand Internet stocks and technology stocks, he couldn't judge their long-term development prospects, so he had to give up. But in 2000, the Internet stock bubble in the U.S. stock market burst. In 2000, 2001, and 2003, the U.S. stock market fell by 9.1%, 11.9%, and 22.1%, and the cumulative decline exceeded half. Buffett, who has stocks in traditional industries, has achieved a victory in value with a 60% increase.People who have experienced the stock market crash understand the essence of Buffett, because most people are not cautious at all when investing. They don't know the intrinsic value of a company's stock, they don't know how big the margin of safety is, and there is no investment profit. The certainty of the stock market may be based on a simple reason: because this stock is rising, it looks like it will rise in the future, so I bought it. But Buffett told everyone that the value will ultimately determine the price: "The market may ignore the company's success for a period of time, but it will definitely use the stock price to affirm it. As Graham said: In the short term, the market is a voting machine ; but in the long run it's a weighing machine." Compared with the investment principle of not doing what he is not good at, Buffett's understanding of bottom hunting is also a magic weapon for him to avoid crises. Today we all know that when the newspaper sellers at the door of the securities company start to talk about stocks, it must be the hottest moment in the market, and the crisis may have been lurking.That goes in the opposite direction: If even the newspaper sellers start talking about the global financial crisis, does that mean that an opportunity has arisen? Buffett's opinion on this is: don't grab the falling knife, but wait for the real investment opportunity.Because you are eager to buy bottoms, it is very likely that what you get is a falling knife, and what you grab is often the blade, not the handle.Although Buffett is best at bottom-hunting, he is even better at ultra-low based on value judgments.Buffett said: Think of stocks as many miniature business units; regard market fluctuations as your friends rather than enemies (profits sometimes come from stupid loyalty to friends); the price of buying stocks should be lower than what you can afford ——In fact, it is not difficult to master these ideas, but few people can stick to them for decades like Buffett.Buffett never seems to try to make money through stocks, and he buys stocks on the basis that the stock market closes the next day, or does not reopen for five years.From the perspective of value investment theory, once you see market fluctuations and think it is profitable, investment becomes speculation, and nothing affects investment more than a gambling mentality.