What was Buffett Doing in 1974? How About in 2008?

"Now is the time to invest and get rich." - Warren Buffet, October 1974

Most measurements indicate that the Great Depression and today's economic situation have very little in common. If you agree with that assertion, then let's start looking at 1974 instead. Why? Because, we will discover what Warren Buffet decided to do in the face of that mid-70s "economic collapse."

As we saw in our recent post, the stock market chart for 1974, looks surprisingly similar to the 2008 stock market chart. From October 1973, through the end of 1974, the markets collapsed.

You may have seen Buffett's recent quotes and interviews:

• "Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
• "Cash is trash", he writes in the NY Times. "Today people who hold cash equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."

And he's putting his cash where his mouth is today.

But what did he do back then?

From his book, Buffett: Making of an American Capitalist,"… His paper losses worsened significantly in 1974. And his net worth, as measured by Berkshire’s share price, fell by half." Yet those "losses" did not discourage the man at all.

In fact the guy was salivating. He wrote this to his shareholders to wrap up 1974, “We consider several of our major holdings to have great potential for significantly increased values in future years, and therefore feel quite comfortable with our stock portfolio.”

And what did he say to the media of the day? With the markets down significantly, and no clear end in sight, the media was hyping gloom and doom at a fever pitch. Forbes magazine interviewed Buffett, and he made his first ever public prediction about the stock market. "How do you feel?" Forbes asked. "Now is the time to invest and get rich. "

And then there was 1975.

And since then, Buffett has made few predictions public and -- as far as I know -- no direct advice on the time to buy or sell stocks.

Until now: “Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

The much hyped "credit crisis", the existing recession, housing, and stock market decline, have clearly scared a lot of people. These are unprecedented times. But in many ways, not unique.

So you can:

1. Try to guess when the recession might end. Try to guess when stocks will run up again. Look for technical V-, U-, or L-shaped market bottoms. Wait for consumer confidence to return. Guess on some other indicator. OR
2. Follow Buffett’s lead, find some depreciated assets, and bottom feed now.

Comments

[Paul Price:]

Nicely put.

You'll only know the bottom after it's past.

Jan 04 11:57 AM

[igggy:]

In 2000, Buffet said the market would go up 6% a year over the next decade. For that to be right, the market would have to more than double this year. No doubt, Buffet timing was good but I think there will be an even better (lower) entry point. But it does look like we might see a nice Obama rally over the next month or two.

Jan 04 12:35 PM

[jepittman:]

As Paul Price says above, you will not know the bottom when you are at it, only looking back. By historical standards stocks and most corporate bonds are cheap. No one will 'get the low'. Dollar cost averaging into assets riskier than treasuries is IMO a good strategy. Staying in cash and waiting for a lower low that may not come could leave you out of the market as money returns to stocks and corp. bonds.

Jan 04 01:03 PM

[Eskin:]

I really agree with this article.

There has been sooo much criticism against Buffett saying that he lost his edge, and he's making silly investments.. it's really interesting because none of those critics will see the outcome of his investments until the far future. Buffett's investing perspective is years, maybe decades, so saying he's making poor choices is irrelevant within the current market conditions.

Jan 04 01:30 PM

[adAstra:]

The 1975 chart might prove to be similar to 2009 market performance. However, the same doomsayers that stated subprime was a huge mess a couple years ago are doing it again. The next "bubble" is the alt-A and opt-ARM mortgages that will be resetting in 2009/2010.

I haven't seen many seekingalpha articles about the effect of alt-A and opt-ARM resets on the housing markets and stock market. I haven't done in depth research on the financial status of companies holding MBS, but I'd be very surprised if they already took losses on those securities.

We might see a several month recovery followed by along leg down - or a long-term W-shaped market.

Jan 04 02:00 PM

[mkreisel:]

Buffett's original quote in 1974 was "I feel like an oversexed man in a harem!"

Let's wait until the first Friday in March and see how much money Berkshire Hathway has committed in equities.

Jan 04 02:10 PM

[The Good Ne...:]

mkreisel,

I debated about putting that quote in the original article. Cut and pasted it back in and out several times.

thanks for adding it here!

GNE

Jan 04 05:31 PM

[Steven Hansen:]

warren buffett's playtime is when the markets are down. he swings so much money that it would distort an up market. i do not think my investing habits would influence the market in any way - so i have more options. warren cannot be a trader - only an investor.

the way you play the game this year depends on how close you are to retiring (or if you are retired). generally speaking those under 40 can be investors in this market depending on their risk appetite.

Jan 04 07:39 PM