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 Executive Chairman's Message - 2008 Semi-Annual Report
For the interim report, I had written three different versions of the Chairman’s Message all of which were similar to the Chairman’s Message from the 2007 annual report, but none of which was sufficiently different to merit printing. In these volatile markets, we remain committed to our disciplined approach to investing in the best quality businesses that will provide long-term capital appreciation for investors. I am therefore reprinting the message from the 2007 annual report, which given the deterioration during the first six months of this year, is even more relevant today. Welcome to 2008. The stock market for the first half of January is continuing the convulsion started in August, 2007, catalyzed by the Sub-Prime Contagion. This may be as good a time as any to put the market’s behaviour in context: The market is an index measuring how people feel about the future, not the present; a barometer, not a thermometer. Fortunately, the market rolls along in an endless series of psychological cycles, which are easy enough to understand but difficult to measure. The cycles of mass emotions are fairly regular and predictable: panic is followed by relief, relief by optimism; then enthusiasm, then euphoria; sliding off again into concern, desperation, and finally a new optimism. Typically in the midst of a washout in a bear market – 1957, 1962, 1966, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998, 2000, 2003, 2008 – quality stocks can see their price cut in half with nose bleed speed. At a major bottom, current business news is usually bad. Many experts feel the situation is likely to exacerbate. Many bankruptcies of significant importance are usual. Unemployment is usually up. There are usually major unresolved National Issues – The Cuban Missile Crisis in 1962, Vietnam in 1966, the Penn Central and brokerage house bankruptcies in 1970, Watergate and the Arab Oil Embargo in 1973-1974, high interest rates in 1981, stock market crash in 1987, Iraq invasion of Kuwait in 1990, Mexican currency crisis in 1994, Asian currency crisis, Russian Ruple crisis, failure of “Long term capital” hedge fund in 1998 and Sub-prime Contagion in 2007-2008. The brokerage business itself is likely to be badly bruised. Wall Street’s own gloom reinforces this syndrome. There is a story of a visitor to a Western Village who is having his hair cut in the local barber shop which is run by an incurable practical joker. After a while crowds of people start streaming down the street, all heading out of town towards a nearby hill. When the visitor asked what is going on, the barber chuckled and said he himself, as a little joke, had started a rumour earlier in the day that there would be a flood. The visitor is amused. As the town empties, however, the barber gets more and more nervous, and finally takes off his apron, puts down his scissors, and says “I think I should get going myself. Don’t bother to pay.” The customer expresses astonishment. The barber says, “It may be true!” Wall Street eventually believed their own press (that packaging inferior quality loans would somehow become quality assets), that they eventually bought for their own account what they were packaging and promoting to Institutional Investors. In the midst of a panic, very few people can resist the trend. It is very uneasy to go against the current. The herd instinct seems to be one of the strongest human emotions. Happiness is not bucking the trend. Eventually, in a market collapse everything cascades during a few catastrophic days and weeks. Stocks are thrown out indiscriminately, regardless of value, for fear that they will be worthless. This, the point of maximum pessimism, presents an indelible opportunity for Professional Investors who are able to maintain perspective, measure and recognize value and, most importantly, have the control of emotions necessary to act, and not be spooked by volatility. Financial markets are much more like Mr. Market, the metaphorical manic depressive, who was first described by Ben Graham and popularized by disciple Warren Buffett. Some days, Mr. Market is Euphoric. On other days, he is very depressed. If you catch him on an Euphoric day, he wants a very high price for his shares. If he is in one of his down moods, he is willing to sell you his shares for a pittance. Recently, Mr. Market is in one of his down moods. Mr. Market highlights the one thing you can predict with certainty about financial markets: Investors will always overreact to events – whether positive or negative. Today we are experiencing the classical symptoms of a bear market. The following current headlines will have an eerie resemblance to previous bear markets. For those of us who have been around for a few decades we could even conclude that we have been here before. Today’s Headlines:
A review of the opportunities presented by the bear markets of the past 20 years, as tracked by the price of Berkshire Hathaway Inc. (Class A Shares), is instructive today.
From the chart, those investors who bought at the point of maximum pessimism, when the headlines were most pessimistic, always prospered. In conclusion, wealth is created by: Buying high quality businesses, in strong long-term growth industries, run by able and competent management, at inexpensive prices. Today we are seeing inexpensive prices.
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Portfolio Team |
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Buy. Hold. And Prosper.®
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