Tag Archives: warren buffett’s thoughts on marketable securities

Marketable securities: operating results count

“In the short run, the market is a voting machine but in the long run it is a weighing machine.” – Benjamin Graham (photo: Wikipedia) was quoted by Warren Buffett as saying this.

In his letter (dated February 29, 1988 for FY1987) to Berkshire Hathaway shareholders, Warren Buffett talked about Mr Market, the character used by his teacher and friend Benjamin Graham to personify the behavior of the market. Mr Market has uncontrollable emotional problems. Then Warren Buffett went on to say: “Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.

“Sometimes, of course, the market may judge a business to be more valuable than the underlying facts would indicate it is. In
such a case, we will sell our holdings. Sometimes, also, we will sell a security that is fairly valued or even undervalued because
we require funds for a still more undervalued investment or one we believe we understand better.

“We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them
for a long time. (Of Wall Street maxims the most foolish may be “You can’t go broke taking a profit.”) We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business. However, our insurance companies own three marketable common stocks that we would not sell even though they became far overpriced in the market. In effect, we view these investments exactly like our successful controlled businesses – a permanent part of Berkshire rather than merchandise to be disposed of once Mr. Market offers us a sufficiently high price. To that, I will add one qualifier: These stocks are held by our insurance companies and we would, if absolutely necessary, sell portions of our holdings to pay extraordinary insurance losses. We intend, however, to manage our affairs so that sales are never required.

“A determination to have and to hold, which Charlie and I share, obviously involves a mixture of personal and financial considerations. To some, our stand may seem highly eccentric. (Charlie and I have long followed David Oglivy’s advice: “Develop your eccentricities while you are young. That way, when you get old, people won’t think you’re going ga-ga.”) Certainly, in the transaction-fixated Wall Street of recent years, our posture must seem odd: To many in that arena, both companies and stocks are seen only as raw material for trades.

“Our attitude, however, fits our personalities and the way we want to live our lives. Churchill once said, “You shape your houses and then they shape you.” We know the manner in which we wish to be shaped. For that reason, we would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones. And we will never find people we like and admire more than some of the main participants at the three companies – our permanent holdings – shown below:

No. of shares Cost Market
3,000,000 Capital Cities/ABC, Inc $517,500 1,035,000
6,850,000 GEICO Corporation 45,713 756925
1,727,765 The Washington Post Company 9,731 323,092

“We really don’t see many fundamental differences between the purchase of a controlled business and the purchase of marketable holdings such as these. In each case we try to buy into businesses with favorable long-term economics. Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow’s ears, we fail.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

 

Warren Buffett’s thoughts on marketable securities

stockpriceboard“We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price,” Warren Buffett said this in his 1977 letter to Berkshire Hathaway shareholders.”

Mr Buffett said that Berkshire Hathaway’s experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies.

“Consequently,” Mr Buffett said, “bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership.”

“When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and
not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority,” said Mr Buffett in the 1977 letter.

Recommended reading:
Berkshire Hathaway Letters to Shareholders, 1965-2013