INVESTMENT OUTLOOK : PERSPECTIVE : MASTER INVESTORS : The Stock Market Collapse Didn’t Send Wall Street’s Sages Running for Cover
What a great time to become an investor.
The overpraised speculators are running for cover: professional money managers selling stocks out of stark terror, and stock market gurus, who chattered of 3,600 on the Dow, now babbling incoherently about rally and decline.
But the great investors remain tranquil. Warren Buffett, who has been called the most successful investor of the present era, hasn’t sold Washington Post Co. or GEICO Corp. or any of the other key stocks in the portfolio of Berkshire Hathaway Inc., the holding company he manages with lawyer Charles Munger.
Philip Fisher, the San Francisco investment counselor who has been investing in good companies for over 50 years, saw bad times coming in a perceptive interview that appeared in Forbes just before the crash. But Fisher isn’t selling Motorola or Raychem or the few other companies he backs because of a bad market. Indeed, one of the most quoted statements from his book “Common Stocks and Uncommon Profits” is, “If the job has been correctly done when a common stock is purchased, the time to sell is--almost never.”
These men are not sentimentalists; they do not hold a stock because they’ve fallen in love with it. Each has made hundreds of millions over the decades for investment clients and themselves--Buffett’s net worth has been estimated at $1.5 billion.
What do they know that market speculators and commentators do not? First, they understand that investing in common stock is buying ownership in a business. Therefore it demands that an investor do a little work to learn how the business works, who runs the company and what its intrinsic business value is--the price the business could be sold for.
The masters also understand the two great corollaries of the first principle: one can know only a relatively few businesses, but a few big decisions are all that are needed because common stocks offer almost unique opportunities for gain.
Extreme selectivity. Master investors don’t scatter their fire; Buffett and Munger have made perhaps 15 key investment decisions in 30 years, Fisher estimates that he has made 14 major decisions over five decades.
Enormous potential. You can make a lot of money by investing in an outstanding enterprise and holding it for years and years as it becomes bigger and better. “I don’t want a lot of good investments,” Fisher has said. “I want a few outstanding ones.”
Outstanding, as in Buffett’s investments in Washington Post Co. or in GEICO (Government Employees Insurance Co.) Buffett and Munger first bought Washington Post in 1973 at around $3 a share. Why? Because they understood and liked the business of newspapers and because the Post was selling at less than a quarter the value Buffett and Munger calculated the company could be sold for.
But theirs was not a modern quick-profit decision. As the Post’s stock price rose steadily in the 1970s, they added to their holdings. Today Berkshire Hathaway owns 13% of the Washington Post Co., and an investment that cost $9.7 million now is worth about $300 million. With GEICO, purchased during the company’s financial crisis in the 1970s, an investment that cost $6.67 a share on average was trading last week in the high $90 range.
Fisher recognized early the potential of some of America’s great companies--buying Food Machinery & Chemical (later FMC) in 1932, Dow Chemical in 1946, Texas Instruments in 1954 and later Motorola, also in the 1950s. Some of those have taken a beating in the crash, but Fisher accepts that his companies will decline in bear markets because good companies tend to do better in static or rising markets.
Fisher has held Motorola, for example, for decades as its value has grown more than tenfold. The arithmetic is impressive even on a shorter-term basis. Since 1977, as the semiconductor business went up and down dramatically, Motorola had gained 500% in value until just before the crash.
Even after the fall, Motorola’s gain over a 10-year period remains 250%, and of course Fisher isn’t selling. The fundamentals haven’t changed, he says, especially the quality of management that Fisher refers to as “the farsightedness and high moral standards of Bob Galvin, Motorola’s chairman.”
You don’t hear speculators and market gurus talk about the quality of the people in their companies. Yet Fisher and Buffett always talk about them. Buffett’s readable and instructive essays in the Berkshire Hathaway annual reports talk about the managers of Capital Cities/ABC or of the Blumkin family that runs the Nebraska Furniture Mart, which is now 90% owned by Berkshire Hathaway. “Despite the enthusiasm for activity that has swept business and financial America,” Buffett wrote in his latest annual report, “we will stick with our ‘til-death-do-us-part policy. It produces decent results, and it lets our managers and those of our investees run their businesses free of distractions.”
If you don’t sell, when do you buy? When others are selling.
Most of the great investors owe their training to Benjamin Graham (1894-1976), who pioneered the idea of investing in a company when its value was being overlooked by others. Graham’s theory was that the world would wake up in time and reward your judgment. Author of “The Intelligent Investor,” perhaps the best book ever written for non-professional investors, Graham looked at several factors in his search for value. He would, for example, compare net assets (current assets minus debt and other liabilities) to the company’s market value (price times number of shares outstanding) and avoid buying if the stock were selling far above the assets.
Graham wanted a stock’s earnings yield (the reciprocal of the price-earnings ratio; a stock at five times earnings has a 20% earnings yield) to be double the Triple-A bond yield--currently 8% to 9%--and the company’s dividend yield to be two-thirds of the Triple-A interest figure (a 5% to 6% dividend yield currently).
The kind of bargains Graham liked became scarce during the bull market, and even after the crash, most stocks have not fallen to Grahamite bargains.
So wait and be patient would be Graham’s advice, and that of his disciples. Wait not only for a bargain, Buffett has said, but for the particular investment you understand and know to be a bargain. It’s a matter worth serious study; after all, you’re buying a business.
