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Equities: Opportunity of a life time

Jan 15, 2009

Those were some gloomy days. The year - 1974. The period - October to December. People were rushing to buy gold and predicting another great depression. The future forecasts for the economy weren't painting a pretty picture. Needless to say, stocks were getting battered. The Dow Jones Industrial Average was trading about 45% lower than the high of about 1,000 points it had made 2 years earlier, at the start of 1973. Warren Buffet was 44 that time and in stark contrast to the consensus opinion, he was looking forward to scooping up beaten down stocks. He had just come out of a period of low activity wherein he felt a huge dearth of good investment opportunities because of the prices not being good enough. Multiples on good stock were soaring. The solid bargains that Buffett likes were not available. So what did he do? He did what he does best - Nothing!

He lay in wait for his prey, patiently behind the bushes. He saw the opportunity of an ambush after the markets gave way and then sprang at the chance.

In an interview with a leading periodical, he explained his strategy with a baseball analogy - "I call investing the greatest business in the world, because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! US Steel at 39! ...and nobody call a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like, then when the fielders are asleep, you step up and hit it."

Buffett likens the crowd in stockmarkets to a bunch of silly drunkards in a great big casino. One moment their drunk on optimism and buy every new issue in sight. The next moment they are drunk on pessimism, buying gold bars and predicting another great depression.

If you find this as having any resemblance to today's market, we won't blame you. The markets have been like this for the past century, and will perhaps continue to be so for the next hundred years.

On being asked how he decided what to buy at that point of time, his guideposts were firm and clear. Like a steadfast lighthouse in a turbulent and stormy sea -

  • Buy at ridiculously low prices. Low by the conventional standards of net worth (book value) and the value of the business as a going concern.

  • Most of all stick with businesses you know and fully understand.

  • Eliminate those that fail to qualify on the basis of value, good management and a limited exposure to hard times.

  • Seek to buy a company which would be worth being the owner of, not because you want its stock price to instantly shoot up after you buy.

So, you're in search of a bargain. But it obviously won't be of any use if you buy a bargain and it continues to remain a bargain forever. That's the first question that comes to mind in a market that's just seen a steep fall and is further made out to have a bad outlook for the future. What if the markets remain depressed forever? Buffett's reply - "When I worked for Graham-Newman, I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right - in the short run, it's a voting machine, in the long run, it's a weighing machine. People have been successful investors because they have stuck with successful companies. Sooner or later the market mirrors the business."

Wise words indeed. What better time than now to act on these words.

P.S. - The Dow shot up 70% in the next one and a half year to touch 1,000 again, almost as if to vindicate what Buffett was saying.

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