Question: "There’s a lot of differences between the recent boom and bust in the stock market and one in the 1920s, but there’s also a lot of similarities. And the similarities are allowing people to draw the conclusion that stock prices will be depressed for some time to come. Where do you disagree or agree with that conclusion?"
Buffett: "Well the whole century is quite interesting. If you take the 20th century, it was an unbelievable century for the United States. The GDP per capita in the United States went up 610%. Actually, qualitatively it went up far more than that. It went up every single decade, including the decade of the 30s. It was up 13% in the 30s. The best decade was the World War II decade, the 40s, it was up 36%. The worst decade was the first World War. So sometimes you get in trouble on analogies.
Interestingly enough, there were six big periods in there for the stock market in both directions. There were three big bull markets.
From 1900 to 1921, the Dow went from 66 to 71, less than a 10% move in 20 years. Less than half a percent a year. You also got dividend too (in half of the gains) so it didn’t move.
From 1921 to 1929, it went from 71 to a high of 381 in September of 1929. It went up 500%. Well, obviously, the well-being of the country didn’t go up 500% during that period and the well-being of the company in the country went up by a whole lot more than 10% during that first 21 years, so you had this very uneven development.
Then from the September of 1929 until the end of 1948, the Dow went from 381 to about 180. It was cut in half. And that was 18 long years and, yet, the per capita GDP was moving right up during this whole period so the economy was doing fine.
From 1948 to 1965, the Dow went from about 180 to up to close to 1,000. Again five for one, which is far outstripping it.
From 1965 to 1981, the Dow went down literally well again the per capita GDP (went up).
Then we’ve had this last period where it’s gone up terrifically. If you take the whole 100 years, it went up 180 for one. Every $1,000 dollars became a $180,000. But 43 and three-quarter years, with those three big huge bull markets, and 56 and a quarter years with period of stagnation all in an economy that was doing fine. For 56 and a quarter years, net, the Dow was down a couple hundred points during that period. And the rest of the 43 and three-quarters years made up the rest of this move from 66 to 10,000.
How could it be that you can have a country that was doing better and better? Every generation was living better than the one that preceded it. But you have these huge changes, big gains a few times and long periods of stagnation – 20 years. That’s a long time to do nothing.
The answer is investors behave in very human ways, which is they get very excited during bull markets. And they look in the rear-view mirror and they see a lot of money having been made in the last few years. They plow in and they just push and push up the prices. And when they look in the rear-view mirror and see no money having been made, they just say this is a lousy place to be so they don’t care what’s going on in the underlying business. It’s astounding, but that makes for huge opportunity. If you can stay objective throughout the waves, that you can detach yourself temperamentally from the crowd, you get very rich. Things can go on for a long time that don’t make sense but they do come to an end."
