Warren Buffett and the dotcom bubble: 2000
The time puts everyone on your site, and in the case of Warren Buffett and Charlie Munger is clear that the time is over proving them right. Today we will see how Warren Buffett said in his letter to shareholders in 2000, after the dotcom bubble had exploded. Before you read this letter, you can see that he wrote in 1999 when they did not invest in Internet companies seemed silly, but Buffett and Munger decided to stay out and invest only in what they knew and understood.
Warren Buffett in 2000
Speculation, in which the focus is not on what will produce the active but on what the next person will pay for it-is not illegal, nor immoral, neither "in American," but it's not a game that Charlie or me like we play. Not bring with us nothing, so why should we take part?
The line that divides investment speculation is never clear or bright, and becomes even more blurred when most market participants have had big wins. Nothing can more sedate rationality that large doses effortlessly earned money. Given a heady experience of this kind, normally sensible people change their behavior to become like Cinderella when she went to dance. They know they are staying too long at the party, consisting of companies with very great speculate capitalizations relative to surely generate cash in the future. Therefore, all investors begin to feel dizzy, plan to leave the party just a few seconds before midnight. Although they have a problem, are in a room in which the clocks have no hands.
Last year we commented market exuberance, and yes, irrationality was what dominated the stock market, so that expectations had risen to repeatedly assume the likely returns. One indication of this was happening was the poll Paine Webber-Gallup made to investors in 1999. In it, participants were asked their opinion on the annual return they expect to have in a decade. The average of the responses was 19% per annum. Surely this was an unreasonable expectation. There was no way for American businesses achieve those returns for 2009.
Were even more irrational the tremendous ratings that participants gave business market almost certainly end up being worth zero. Even so, investors hypnotized by some quotes that kept up and ignoring everything else, put their money in these companies. It was as if a kind of widespread virus among professional investors and amateurs create hallucinations in which these give a value to the actions of certain sectors often above the supports.
Warren Buffett and the dotcom bubble: 2000
This surreal scene was accompanied by a lot of talk about "value creation". We recognize that a lot of real value has been created in the last decade for new businesses or young, and there is much more to come. But the value is destroyed, not created, when you lose money throughout his life, and no matter how high can become your review.
What was really happening was a transfer of wealth. Because of certain agitators in recent years billions have been moved from the pockets of individuals to their own (and those of their friends and associates). The fact is that the bubble has allowed the creation of bubble companies, entities designed not to earn money with investors, but to earn money from investors. Too often the real goal of the founders and promoters of these companies is to bag them out without paying attention to the results.
But a pin stalks each bubble, and when the two finally meet, a new wave of investors learns some old lessons. First, there are many people on Wall Street, a community in which quality control is priceless, willing to sell investors anything they will buy these. Second, speculation is most dangerous when it looks easiest.
In Berkshire we do not try to pick the few companies that will do well in an ocean of companies that have not proven anything. Are not we smart enough to do something, and we know it. Instead, try to apply the old Aesop equation on opportunities where we have the confidence of knowing how many birds are in the bush and when they fly (an expression that my grandchildren reformulated to "a girl in a convertible is worth as 5 on your agenda "). Of course, we can never predict the timing of the cashflow exactly. However, they do try to make conservative estimates and focus on sectors where the surprises in business are unlikely and not wrecking the business. Still, we make many mistakes: remember, I'm the guy who thought he understood the economic future of trade in stamps, textiles or shoes.
Buffett and Munger were kept within your circle of competence and outside the euphoria over "a new paradigm" made them stay outside major revaluations of the bubble, but beat the market during this period.
Moreover, Buffett and Munger were aware that large revaluations and high expectations, when they become somewhat extended, usually end badly, and what they do is attract people who want to make quick money, not investing.