by hverespej
Article: Mr. Buffett on the stock market, Fortune, Nov 22, 1999
I came across this article when doing a small write-up about Cisco’s 2000 peak.
I searched and it’s been posted in this sub before, but it’s been 4 years since then. So, I figured anyone else who hasn’t seen it before, like me, might find it useful to have it re-surfaced.
It struck me because there’re a couple things that feel current to me:
- What conversations with friends sound like
- Valuation multiples
- Mag 7
- AI
I know this isn’t 2000. And, maybe the article always feels current. But, I feel like the points made help me ground myself.
Here’re a couple quotes that stood out to me (but, really better to read the whole thing):
“Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors–those who have invested for less than five years–expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%.”
“You know, someone once told me that New York has more lawyers than people. I think that’s the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems–and in my view a major reslicing of the pie just isn’t going to happen.”
“Beyond that, you need to remember that future returns are always affected by current valuations and give some thought to what you’re getting for your money in the stock market right now. Here are two 1998 figures for the FORTUNE 500. The companies in this universe account for about 75% of the value of all publicly owned American businesses, so when you look at the 500, you’re really talking about America Inc.”
“Bear in mind–this is a critical fact often ignored–that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices. Let’s say the FORTUNE 500 was just one business and that the people in this room each owned a piece of it. In that case, we could sit here and sell each other pieces at ever-ascending prices. You personally might outsmart the next fellow by buying low and selling high. But no money would leave the game when that happened: You’d simply take out what he put in. Meanwhile, the experience of the group wouldn’t have been affected a whit, because its fate would still be tied to profits. The absolute most that the owners of a business, in aggregate, can get out of it in the end–between now and Judgment Day–is what that business earns over time.”
“Let me summarize what I’ve been saying about the stock market: I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like – anything like – they’ve performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate – repeat, aggregate – would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.”
“I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
The market is getting even more concentrated:
The market cap of the largest US stock is now ~750 TIMES larger than the 75th percentile stock, near the most since 1932.
Over the last 8 years, this difference has TRIPLED.
Furthermore, the market is currently even more… pic.twitter.com/va1Rld9kVN
— The Kobeissi Letter (@KobeissiLetter) October 29, 2024