Mr. Buffett on the Stock Market (1999)

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

by tim_sw • 11 years ago

24 14 11 years ago

archive.fortune.com

lujim5• 11 years ago

Ahem... Facebook. Somehow Facebook is "worth" more than GE and analysts LOVE it. They are beating earnings but their numbers just don't look all that great to me. A P/E of 107 which wouldn't be insane if the growth was there to back it up. The "growth" that they do have is in selling ads that people don't click on. Yes they are a treasure trove of marketing data, but are they really more valuable than General friken Electric? What am I missing here?

Downvotes? Is Zuck already checking out hacker news this morning ;)

charlesdm2• 11 years ago

Indeed. Facebook is great, but I highly doubt a P/E ratio of 107 is warranted. Growth is sort of slowing, and monetization is good but not amazing. People are spending more and more time on mobile, which generally is harder to monetize than the web.

It's a good company (and I've owned the stock before), but I wouldn't mind seeing the P/E ratio come down a bit, to the 30-50 level.

Edit: Don't trust analysts, they get it wrong plenty. Try to understand the catalysts that drive the long term stock price of a company.

acconrad• 11 years ago

What you're missing is called momentum investing. People are riding on the momentum of Facebook based on trailing properties from the last 3/6/12/x months [1]. If you were a value investor, like Buffett, and your valuation was based on fundamental analysis, you would have a very hard time making a compelling case that Facebook is fairly valued.

The other difficult thing about tech stocks is their store of value is vastly different than traditional industrial companies. Most of where people find value in the business of Facebook is it's the only real central store of more than 1 billion people's personal information. How do you price that? You can't buy a person (intangible asset) like you can buy a machine (tangible asset), but there is a price to having that knowledge. It's also not IP, like the primary intangible asset of biotech and pharma stocks.

Can you see why people like Buffett (and his mentor, Ben Graham) don't believe in the Efficient Market Hypothesis?

[1] http://www.investopedia.com/terms/m/momentum_investing.asp

lujim5• 11 years ago

There is a fair argument that momentum investing doesn't beat "buy and hold". I like watching the 200, 100, and 50 day moving averages but that's as technical as I get. I get off the boat at channel breakouts and resistance levels. I think it becomes a pseudo science at that point. The best argument on this I've seen is in "A Random Walk Down Wall Street" by Burton Malkiel.

The Efficient Market Hypothesis is on shaky ground a lot of years. I guess it works in the sense that markets will correct given enough time, but I'm mostly sitting this market out since the end of QE4. Sure I'm missing out on some gains, but gains are only real when you can sell on time.

ucha• 11 years ago

Their estimated forward P/E (by Dec 2016) is 37.

They compare in size to large advertisers like major cable channels; the comparison to GE doesn't seem relevant to me.

lujim5• 11 years ago

37 is still a bit expensive for my taste. Look at their PEG (P/E divided by growth). It would be nice if it was below 1.

The comparison the GE is because it is one of the bluest of blue chip stocks. They have mountains of assets and employees. Facebook has a lot less of both.

lakeeffect• 11 years ago

I think if more people realized that p/e was the equivalent to years to payback they might reassess their portfolio. 107 years of current earnings is a long time to get your money back. Earnings growth is the only thing that lowers this number when consumer stock preference is based on brand recognition.

charlesdm2• 11 years ago

Amazon is trading at nearly 1000x P/E. Even with their strategy and their scale, I don't see it. I really don't.

bobm_kite9• 11 years ago

My favourite piece of advice here:

| Sometimes, incidentally, it's much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then it's better sometimes to turn these things upside down and that was to short horses. Frankly, I'm disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a "short squeeze."

lujim5• 11 years ago

The problem with shorting anything right now is that the Fed can keep things going higher with zero interest rates and you can get squeezed out of that. You might be able to see trouble spots in the market, but you can't even make an educated guess on when a few people with various political and financial incentives will quit flip flopping and make a decision.

cconcepts• 11 years ago

There is something revealing about human nature when you consider that Buffett gives his proven wisdom away for free while a whole industry of prognostication thrives based on a track record not half as reliable as his.

lujim5• 11 years ago

Totally true. The "problem" with Buffett is that his advice is a bit of a bitter pill because it's slow, steady and takes decades. It's hard not to trick yourself into believing that you can beat the market consistently (as a retail investor at least). He's totally right, it just isn't all that exciting.

samclearman2• 11 years ago

Actually a bigger problem is that his advice is just straight up hard to follow. If correctly valuing public companies were easy, the market would be a lot less volatile.

samclearman2• 11 years ago

... Since then interest rates went to zero and corporate profit as percent of GDP went to 10. I guess that's why he doesn't like to try to predict the market :)

Mr. Buffett on the Stock Market (1999)

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