How does Warren Buffett operate when the market plummets?
Editorial Department of this journal | Wang fei
"We'd like to be able to find more businesses like what we have now, and of course it takes some help, and if you know of a company that fits the above criteria, call or preferably write to me. These are the words of Warren Buffett in his letter to shareholders after the 1987 US stock crash.
Unlike most investors, Warren Buffett is not afraid of a market crash, and he enjoys such price drops. "Whether we're talking about socks or stocks, I always like to buy enough when the market is down," he said. ”
Enjoy the drop in prices
The long-term bullish trend of U.S. stocks is envied, but in its nearly 100-year history, there have also been many epic adjustments, such as the 1987 crash.
In the first half of 1987, the U.S. economy ushered in an unprecedented boom, and many stock indexes in the New York stock market hit new highs. But at a time when the streets of New York were full of stock recommenders, Wall Street's harvesting machine began to turn.
On Monday, October 19, 1987, the New York stock market on Wall Street went into a crash. The Dow Jones Industrial Average plunged 508 points, or 22.6%, on the day, its largest single-day decline since 1941. The plunge in the New York stock market also had a "domino" effect, with capital markets in London, Tokyo, Sydney, Hong Kong, and Singapore also falling by more than 10%. The day is also named "Black Monday".
In the long run, the Dow Jones Industrial Average retraced more than 40% from the year's high on August 25, 1987 to the relative low on October 20, 1987, and many millionaires became vagabonds, and Warren Buffett also suffered some losses during this period.
But in this regard, Buffett pointed out in a 1988 letter to shareholders that such a market is absolutely beneficial to any investor. "Many commentators, looking at recent events, have come to the incorrect conclusion that because the stock market is in the hands of large investors, there is no opportunity for small investors at all. In fact, the market volatility caused by fund managers with large amounts of money gives genuine investors a better chance to carry out their smart investment actions. Regardless of the amount of funds, as long as you can stick to your investment philosophy and face stock market fluctuations, you will not be forced to sell your holdings at the wrong time due to financial or psychological factors, it is difficult to be hurt. ”
But at the same time, Buffett admitted that he "missed" the opportunity to increase his position. "We really didn't have much to do in the stock market over the last few years at Berkshire, and during that October period, a few stocks fell to prices that were quite attractive to us, but we weren't able to buy enough shares before they rebounded, and at the end of 1987 we didn't add any major equity portfolios (meaning more than $50 million) other than permanent holdings and short-term arbitrage. ”
"But you can rest assured that once Mr. Market gives us another chance, we will take advantage of it. Warren Buffett said.
In the 2008 "squat" of U.S. stocks, Warren Buffett also said, "The market value of our long-held bonds and stocks has been affected by the sharp decline in the market, which does not annoy Charlie and me." When we have enough funds to increase our positions, we enjoy the price drop. A long time ago, Graham told me 'the price is what you pay and the value is what you get'. Whether we're talking about socks or stocks, I always like to buy enough when the market is down. ”
Do what you can
So, what should you look out for in addition to stocking up on enough cash to buy enough goods when the market is down?
In the early 2000s, for example, the U.S. stock market saw a rise in housing prices due to falling interest rates, and the demand for housing gradually increased. As a result, banks decide to open up subprime loans (usually loans provided by lenders to borrowers with low credit scores and unstable incomes) and sell the bonds to investment banks, which in turn sell the bonds to investors.
However, due to the extremely relaxed review of loans, housing prices continued to rise, and later even if they could not afford to take out loans, housing prices began to fall again. The original buyer mortgaged the house to the bank, and the investor eventually paid for it. Subsequently, the cash liquidity of investors became problematic, and the collapse of Lehman Brothers, the fourth largest investment bank in the United States, signaled the beginning of the subprime mortgage crisis. According to statistics, this leads to the evaporation of fifty percent of the Earth's stock price.
In this regard, Buffett said in a 2009 letter to shareholders, "Borrowers happily lend money to people who simply cannot afford to pay it back; The lender also did not hesitate to sign an installment agreement. Both sides want 'rising property values' to pay for this arrangement, which is simply not possible. The heroine of "Gone with the Wind" Hao Scarlett said well: "There must be a road before the car reaches the mountain, and it is not too late to think about it tomorrow." Today, all aspects of our economy are tasting the bitter fruits of this behavior. ”
Of course, Berkshire was not immune to the subprime mortgage crisis, but it did not suffer unexpected losses. In this regard, Buffett said, "It's not because these lenders are creditworthy. FICO, an index that measures creditworthiness, shows that our Lender Credit Index is 644 and the national average is 723. Thirty-five percent of our borrowers have a credit index below 620, which is often considered to be a credit concern. ”
"Why are our lenders doing so well? They don't have a mediocre income, they don't have a good credit rating, the answer is very simple, our lenders are just lending within their means, and they look at the loan agreement to see if it's within their actual income, not their expected income. When they take out a loan, they think about how they will repay it, regardless of how the house price changes. Warren Buffett said.
And at the Berkshire shareholder meeting in 2023, Buffett and Munger also pointed out that they should spend less money than they earn, live within their means, and try to avoid credit card debt, because interest rates are too high, and you need to make more money to outperform the interest rate on credit card debt. At the same time, try not to go into debt outside of your mortgage. Buffett also stressed that don't make mistakes that could get you "out of the game".
"It's other people who give you the opportunity to do stupid things. When others make the wrong decision, investors who are particularly focused on value get an opportunity. Warren Buffett said.
Six indicators for stock picking
Combined with the performance of the U.S. stock market in recent years and Berkshire's public holdings, Warren Buffett has practiced the theory of "buying enough goods when the market falls".
For example, in the first three quarters of 2022, the U.S. stock market was the bears of the world, among which the Dow Jones Industrial Average closed down by more than 20%, the Nasdaq index closed down by more than 30%, and the S&P 500 also fell by more than 20%. But at the same time, Berkshire's top 10 heavyweights in each quarter generally increased their positions to varying degrees. Among them, in the first and third quarters of 2022, Occidental Petroleum and TSMC respectively received new heavy positions from Berkshire (see attached table).
Why is this rebalancing?
In a 1988 letter to shareholders, Warren Buffett said that the companies we hold need to meet the following criteria: (1) Huge transactions (at least $10 million per year in after-tax surpluses); (2) Sustained and stable profitability (we are not interested in companies with prospects or turnarounds); (3). High shareholder returns (and little borrowing); (4) Have a management level (we cannot provide it); (5). Simple enterprises (if too much high-tech is involved, we can't understand); (6). Reasonable price (we don't want to waste too much time with each other before the price is uncertain).
Its buying and selling operations in the first three quarters of 2022 are basically in line with these indicators. For example, Apple, which has increased its position for two consecutive quarters, will have a profit after tax of 99.803 billion yuan in 2022, and the year-on-year growth rate of net profit attributable to the parent company in the past ten years (to 2022) will reach 139.15%; Another example is the United Bank, which sold during the second quarter of 2022, and its year-on-year growth rate of net profit attributable to the parent company in the past ten years is significantly low, only in single digits.
"We'd like to be able to find more businesses like what we have now, and of course it takes some help, and if you know of a company that fits the above criteria, call or preferably write to me. Warren Buffett said.
(The individual stocks mentioned in the article are for example analysis only, and do not make trading recommendations.) ）