Buffett in 1974: A Reminder For Turbulent Times

Posted on July 16, 2008
Filed Under Crowd Stupidity, Value Investing |

If you have never read Buffett: Making of an American Capitalist, you really should. It is excellent. In this falling market, it sometimes makes sense to remember what the Oracle of Omaha did during one of the worst bear markets of his early career. This story comes directly from the book.

Meanwhile, the stocks Buffett had bough for Berkshire were sinking. By the end of 1973, the market value of Berkshire’s portfolio, which had cost a total of $52 million, had sunk to only $40 million…

… His paper losses worsened significantly in 1974. And his net worth, as measured by Berkshire’s price, fell by half. Yet it seemed to dampen his spirits not at all…

…Buffett’s rare ability to separate his emotions from the Dow Jones Industrial Average was a big part of his success. In the sixties, when he had been making tons of money, he had been full of fearful prophecies. But now, with his portfolio underwater, he was salivating. Writing to Berkshire’s shareholders, his optimism was evident:

“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.”

One such holding, Affiliated, reported a 40 percent earnings increase for 1973. Nonetheless, the stock fell like a stone. Having gone public at 10 a share, it sank within months to 9, 8, 7 1/2 — less than 5 times earnings. This was the acid test of an investor. When a stock drops by 25 percent, it is only human to wonder if one has made a mistake. Buffett, though, truly believed that he knew better than the crowd. On January 8, 1974, he bought more Affiliated — and more still on January 11 and January 16. He was back in the market on February 13, 14, 15, 19, 20, 21, and 22. He went on all year, like a thirsty man holding a bucket out in the rain. He bought Affiliated on 107 days, down to a low of 5 1/2 a share.

So what happened? Well, in the 1979 letter to shareholders Affiliated is listed at a cost of $2.8 million and a market value of $8.8 million. By the 1985 letter, Buffett had purchased a total of $3.5 million of Affiliated that was now worth $55 million. I don’t want to dig through all the letters to figure out when Buffett sold (if he did) but I will tell you that in 1993, the New York Times bought Affiliated Publishing for $1.1 billion.

It takes a strong stomach to weather falling stock prices. And you have to be careful. Low P/Es don’t necessarily mean a good deal. But remember that markets like this are chances to buy $1 worth of earnings for a lot less than $1. Find those good companies, park some of your capital, and ignore the stock price.

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