Stock Investing and Uncertainty

JOE: Warren, we’ve come back — the market’s come back a long way, as you know. And you’ve commented, and I know on any given day you’re not going to say whether it’s expensive or cheap or whatever. But have we fixed enough of what got us into the mess to warrant being back at 10,700, or is this a bit of a bubble from all of the Fed accommodations and in all the things that the extraordinary measures we’ve taken? Do you have a feeling for whether this is real and supported?

BUFFETT: Well, I have no feeling at all, you know. As you’ve said, I don’t know where the market’s going to be in a day, week, month or year. I do know that if I had a choice between holding cash or 30-year bonds or owning equities, I wouldn’t hesitate for a second to own equities. You know, the market is up quite a bit from march. But it’s down a lot from three or four years ago. And if I were going to buy a farm, Joe, and somebody said, well, with great certainty, they said, you know, this is going to be a terrible year in terms of weather, I wouldn’t say, well, I’ll only pay $1,100 an acre, but I’ll pay $1,500 an acre if you’ll give me a favorable forecast if I am going to own a farm for 50 years. I am going to have a few lousy years in terms of weather. I’ll have a few good years and a lot of pretty good years. And the idea that you try to time purchases based on what you think business is going to do in the next year or two, I think that’s the greatest mistake that investors make because it’s always uncertain. People say it’s a time of uncertainty. It was uncertain on September 10th, 2001, people just didn’t know it. It’s uncertain every single day. So take uncertainty as part of being involved in investment at all. But uncertainty can be your friend. I mean, when people are scared, they pay less for things. We try to price. We don’t try to time at all. And pricing, I would rather own equities today –

JOE: People say all the toxics — people say all the problems that we had in March at 666 on the S&P that nothing’s changed. Toxic assets are still somewhere. We’re still overleveraged. You hear that all the time. That nothing’s changed, and here we are 70% higher than where we were. They say it’s just not supportable.

BUFFETT: Well, I would say they’re making a mistake in terms what they were selling for in March. I mean, you know, if, like I say, if I buy a farm near here, you know, and it turns out to be a terrible year and pests come in and there’s no rain and all that sort of thing, am I going to sell it for half the price it was selling for a year earlier when I know over the next 100 years there’s going to be 90 years that are pretty good and a few bad ones? It doesn’t make any sense to try and time things that way. Nobody knows what’s going to happen tomorrow, ever. The only thing is they get very apprehensive about it at certain times, particularly when other people are apprehensive. When people get scared, they get scared as a group. The confidence comes back sort of one at a time. There has been a lot of things that have been cleaned up in the economy in the last 18 months. A lot of the toxic assets are in better shape. There are going to be 4.5 million homes or thereabouts sold in year. There are 80 million homes roughly in the country. 25 million don’t even have a mortgage. Of the 4.5 million homes that are sold, the people that are buying those are putting down reasonable down payments in many cases, buying much more cheaply, covering it better with their income, so the liars’ loans have just disappeared to a great extent, so every day those homes are going into better hands. 4.5 million homes will be in better, stronger hands, people that can handle payments better at the end of the year than the start of the year. So the system is cleansing itself but it doesn’t do it in a day, a week, a month, or even a year.

Source: Warren Buffett’s ‘Stock Split’ Interview, 20 Jan 2010