Warren Buffett has recently reiterated that stock investments should be considered as investments in businesses, rather than mere speculation on market changes. During a CNBC interview, he referred to a scenario in 1932 where General Motors had 19,000 dealers but each one sold just a small number of cars due to a challenging economic climate. Buffett noted that such situations often offer excellent buying chances.
He expressed that market forecasts cannot be accurately gleaned from newspapers or by daily speculation. True investment success hinges on evaluating the prospect of future earnings over many years. He underscored the fallacy of making frequent decisions about stocks, advocating for a focus on fundamental worth rather than transient market fluctuations.
“If you assess the value of your investments in terms of future earning power over the next 10, 20, or 30 years, you’ve made a wise investment,” Buffett remarked. “And making those picks on a daily basis is impossible. I certainly can’t do it.
So far, I haven’t met anyone who truly knows how to accomplish that.”
Buffett’s observations remind us that successful investing demands time and a thorough comprehension of the intrinsic value of one’s investments. Even with the market’s considerable upswing, evidenced by the S&P 500 rising 36% over the past year, it’s reasonable for investors to feel apprehensive. The Shiller Cyclically Adjusted P/E (CAPE) Ratio stands at a level it has only reached four times since 1871.
Yet, utilizing the CAPE ratio as a tool to forecast market crashes isn’t particularly effective, although it does have a fair history of suggesting likely future returns. Remarkably, investors at Berkshire Hathaway have been accumulating substantial cash reserves and trimming their stakes in major shares such as Apple and Bank of America.
Buffett’s investment philosophy elucidated
Traditionally, large cash reserves have been built up prior to significant market downturns, an indication some view as a warning that the market might be inflated. Sooner or later, the stock market will encounter another crash. Speculating on precisely when that will occur through indicators like the CAPE and similar measures is less important than honing in on identifying excellent growth companies.
Exercising patience, discipline, and perspective is paramount. Staying focused on quality investments and adhering to a solid investment plan is advisable instead of being swayed by market hype. Even in the event of a bubble burst and subsequent crash, there could be benefits.
Bubbles can funnel resources into crucial projects that typically wouldn’t warrant funding or development under standard cost-benefit evaluations. They accelerate the future by concentrating vast amounts of financial and human capital on very distinct future aspirations. As distressing as a crash may be, it also comes with its advantages, particularly for long-term investors.
Technological advancements stem from creative destruction, and crashes often lead to more favorable prices for accumulating additional shares. If you’re committed for the long term, such downturns might be unpleasant initially, but are often beneficial in the longer view. Consider the ASX 200 Index during the COVID crisis.
It dropped by 32%, yet investors today have seen an 18% gain from the pre-pandemic peak. This is why some investors may not be overly concerned about a market crash. And perhaps, after reflecting on this, you might feel similarly.
