Why Warren Buffett Hopes His Stocks Go Down
Investing in Economics vs Investing in Markets
Some years ago, Warren Buffett said in an interview that he hopes the stocks he owns go down, so that he can buy more. My initial reaction was surely this time he is just being provocative. But actually what he said makes perfect sense.
There are two fundamentally divorced aspects of the stock market, and even the more disciplined investors tend to contaminate the one with the temptations of the other.
The stock market is a “discounting” mechanism: a constant auction in present dollars for the right to future dollars. Future dollars are always worth less than present ones, not just because of the general trend toward inflation or the time value of money (something different), but the fact that invested (in contrast to static) capital generates more capital — provided the investment is in something that proved sound and destined to indeed create underlying wealth, i.e. a business that continues making money. But the amount of dollars it will harvest is not certain — and even if it could be positively ascertained, those future dollars’ value in terms of the present value of the currency would still have to be assessed on a best-guess basis. These combined uncertainties are assessed in terms of present dollar value and “discounted” back to the present.
The two ways to make money on the stock market derive from pegging investments either to actual wealth creation in the real economy or to predicted changes in that future wealth’s present discounting. One is investing in the literal sense — the use of idle money (a zero-sum commodity) to create wealth (an expandable or collapsable commodity), while the other is financially indistinct from gambling — participating in a betting pool on future events and collecting the money of those who predicted incorrectly. There may be an art or a discipline to the latter (I know someone who paid for grad school by studying horse racing and out-betting the competition) — just as there may be one to poker. But in no meaningful sense is this practice investing. Warren Buffett is not interested in anything that is not truly investing. (He and his partner even go so far as to slander those who hedge their investments with gold holdings).
Much of the confusion surrounding this comes from a third category, neither investing nor bookmaking, but the sector of financial industries. Every business sells a product or service — and funds, investment advice, brokerage access, credit reports, stock analysis, trading tools — are products and services. The practice of providing them can blend with the other two activities, sometimes insalubriously.
If you seek to make money on the stock market through sound decision-making and well-calculated risks, you must be able and willing to assess the fair price of a security, completely independent of what the market suggests it is worth at any given time, i.e. its current “discount.”
The situation could be compared to a player in baseball training who has to walk through a row of steroids dealers every day on his way to the gym. Some market their products fabulously — only someone who truly knows who he or she is can tune it out as the dangerous distraction it is. If you had only gotten in and out a second earlier, you could have been rich! It is often noted that if you divested over the wrong fourteen or so days from 1929 until the present, you would have missed the entirety of the last ninety years of gains. If predicting which fourteen those are going to be sounds fun to you, you might be in the wrong business as an investor.
The problem could be stated thusly: it is possible for an intelligent investor to predict which economic events will transpire with high accuracy, within what Buffett calls his “sphere of competence.” It is *not* possible to know *when* those events will transpire, nor how quickly.
This truth is magnified by quantum proportions when speaking of market events, as opposed to mere economic events. The intelligent way to invest is the one that gives you the power to remain stoically indifferent to the erraticism of the market, because of the confidence your analysis gives you that when the dust settles, the market “discount” will revert to actual underlying economic value accrued.
In the pre-Internet age when every prestigious stock office had a ticker with real-time prices, Buffett was famous for not having one. The market, which his first teacher Ben Graham personified as “Mr Market”, is like a manic-depressive that alternates offers to sell you his share in your business at rates far too high and far too low. The only way to lose is to be forced to sell to him on his terms, i.e. his chosen time. And the only reason anyone would ever do this is by losing liquidity, through over-leverage, or through lack of confidence, through under-analysis.
This is why Buffett is perfectly happy if his stocks go down — he will not touch a stock with a stick until he has fully done his homework and determined what he thinks it is worth — and at that point, he is thrilled if it plummets, because he is willing to wait indefinitely for the discounted price to reflect the actual, underlying value of the asset it represents, which it eventually necessarily will. Graham once said that in the short term the market is a voting mechanism, but in the long term, it is a weighing mechanism. What he meant was that emotions and fads can affect predictions about future events, but they become irrelevant once those events come to pass. The stock market is nothing more than a prediction about future events — the amount of money its underlying securities are destined to earn.
