Buffett and Gates at Columbia – The Markets Have Bottomed! 17 comments
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Warren Buffett told an audience of cheering Columbia University students last night that the worst of the financial global crisis is over. Moreover, he also said that stocks have bottomed out. His advice was not to pass on something attractive today. He was joined by Bill Gates, who agreed with his sentiments.
What struck me about watching the interview was the strong faith in our country and its future they both displayed. Both men acknowledged that mistakes can and will be made. However, they both are confident that the free enterprise system, we live under will survive and prosper. Neither man would forecast the short run. However, both held sensible and insightful positive long-term views.
I thought it might be entertaining to look at the companies both of these business giants started and control from the perspective of our earnings correlated Fundamentals-at-a-Glance research tool. Even more fun is to examine them first over 20 years, a real long run, then over the past 10 years, a shorter long run.
Figure 1 looks at Microsoft’s (MSFT) stock price correlated to earnings and its track record. Note how overvalued Microsoft got during the irrational exuberance tech bubble from 1995-1999. This clearly validates the importance of valuation.
Fig. 1. MSFT 20yr EPS Growth and Price Performance
Figure 2 looks at Berkshire Hathaway (BRK.A) over the same time frame. Note how flat and inconsistent both earnings and stock price were for the period 1997-2001. This clearly validates the importance of earnings.
Fig. 2. BRK.A 20yr EPS Growth and Price Performance
Over the past 20 years, both companies generated substantial wealth for their owners. Bill Gates was the clear winner, although Warren’s numbers weren’t too shabby. The years since 2000 tell a different story. The value of Warren’s stake in Berkshire Hathaway doubled in value. However, due to excessive overvaluation, Mr. Gates saw the value of his Microsoft holdings cut in half.
Figure 3 shows Microsoft’s price correlated to its earnings since calendar year 2000 and performance.
Fig. 3. MSFT 11yr EPS Growth and Price Performance
Figure 4 shows Berkshire Hathaway’s stock price correlated to its earnings since calendar year 2000 and performance.
Fig. 4. BRK.A 11yr EPS Growth and Price Performance
Conclusion
The skeptics will scoff that it’s easy for these men to be optimists because they are so rich. We say these guys are so rich because they are optimists. Many want to write our country and its future off. We believe they are greatly short-changing the power that our great nation possesses. In every adversity lies the seed of a greater or equivalent benefit. What we have recently experienced was, by any measure, horrible. However, as Warren Buffett indicated in his talk last night, it has hopefully made us all a little smarter. Bill Gates pointed to several industries that he felt would revolutionize our future in much the same way that Microsoft once did. Therefore, let’s move confidently in the direction of our futures.
Disclosure: No Holdings in the stocks mentioned at time of writing.
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This article has 17 comments:
With all due respect, Buffett will proffer this advice at any given time. There are always bargains somewhere to be found. The question is, have you found one?
Of course they wouldn't forecast the short run, because they (or, at least, Buffet) knows damn well that even if 666 was "the bottom", no-revenue-growth markets can easily compress to 12x earnings, and a 12x multiple on the $63 current annualized S&P 500 would put the market in the 750s, which would be around 30% lower than where it is today. Buffet has also been saying that while business for his vast myriad of companies appears to have stopped getting worse, it still stinks and hasn't been getting better (i.e., "no revenue growth"). He also admits that he probably overpaid for his railroad, but there was a great column on Bloomberg by his recent biographer about this, which theorized that this was Warren's "legacy deal"-- something with "wide moats" that used up most of his cash, so that if anything happens to him, his successors won't be able to f*ck up his company too badly. And, as an added attraction, the pricing power of a railroad semi-monopoly provides a reasonable hedge against inflation. I'll bet you dollars-to-Dairy Queen that if Warren were 20 years younger, he would've offered enough less for that railroad that instead of accepting his offer in 15 minutes, it would've rejected it in five.
Whether or not he falls into the same trap he preached about when he was against playing cycles and only value remains to be seen. Personally, I appreciate the old Buffet not the one trying to make profit off of government bailouts and calling the end of the recession over and over again. I wonder when he will publish another "it's a great time to buy stock" article. Maybe after he buys into Goldman again. Maybe he will someday write it's a great time to sell after he dumps Goldman. That would make his on the same level as the con artists stock promoters. I dearly hope he never goes there. A good name is a great force for making people recognize value instantly, but it is also a terrible thing to ruin.
And an owner of BRK for about 20 years now letme make a observation
1997-2001 BRK earnings were poor for 2 reasons
1) large stake in KO which got to 65 times eranings fell drastically after it peaked in 1997
2)9/11 was adisaster for the p&C business
Of course, there are problems, such as financial reform and the long term deficit, that have to be dealt with in a reasonable way. Nevertheless, I'd rather face these problems than the problems confronting young folks a generation or two ago.
rgds
Rgds
On Nov 14 10:46 AM bobbybutte wrote:
> as a person who is financially independent solely from dividend investing
>
>
> And an owner of BRK for about 20 years now letme make a observation
>
>
> 1997-2001 BRK earnings were poor for 2 reasons
>
> 1) large stake in KO which got to 65 times eranings fell drastically
> after it peaked in 1997
>
> 2)9/11 was adisaster for the p&C business
That said, it is curious that late in his life, he has dabbled (more than dabbled) in derivatives (which he once called "financial weapons of mass destruction"); in the economy (which he famously stated often did not influence him one whit in his evaluations of investments); and now actually making a stock market "call." The first one (derivatives) can be understood in the context of a man who genetically recognizes and profits from mis-priced assets. The second one (the economy) can be understood in the context of his enormous power and influence.
The third (market call) cannot be understood in any context that I can think of. It seems to go against everything he has always preached about markets. What's next...the Buffett TA Charting Service?
hartykeating
On Nov 14 11:29 AM Advill wrote:
> I will follow you now on,your page and your approach seems quite
> interesting.
>
> Rgds
> What means p&C business?
> hartykeating
---------
In the insurance business, "P & C" stands for "Property and Casualty" insurance. Property as in paying damages for the Twin Towers", casualty would include things like liability claims etc.
en.wikipedia.org/wiki/...
www.wisegeek.com/what-...
It looks like MSFT is a reasonable buy right now, especially with Windows 7 doing great. My only issue is the sheer size of the company, very hard to get good growth with a company that size.
Thanks again for the kind words,
Chuck