The world is drowning in potential technological revolutions. From hard core professional investors to the happy amateurs, there is no end to people who consider themselves able to find the winners. Warren Buffett - and the story - shows, however, that finding the winners in technological revolutions is extremely difficult. It is much easier to find the losers.
Warren Buffett is one of the world's richest men. He has made his fortune investing in equities - according to his own statement by using Value Investing with the concept's author, Benjamin Graham, as a model. In addition, he has had a tremendous ability to see how the dynamics and interplay between fundamental economic conditions and trends and new innovations interact and affect sectors and businesses. And with an important detail - he emphasizes that he never invests in anything he doesn't understand.
The inecapable fact is that the value of an asset, whatever its character, cannot exceed the long term grow faster than its earnings.
Numerous studies show that professional portfolio managers, as a rule, are unable to consistently beat the market or stay on top of the best investors over long periods of time. But there are some exceptions, and Buffett is the most famous and successful. Business Insider calculations in February 2016 show that 1000 dollars invested in Buffetts company Berkshire Hathaways from taking it in 1964 would have grown to 10,5 million. dollars in February.
If Buffett will be able to do just as well in the digital community, for the time being, is a little uncertain. With an exponential technological development, the world has become more difficult to understand and predict. And history shows that few have become rich in innovations that have revolutionized society. Ultimately, it is the consumers and society as a whole that stand as winners.
Interest rate increases paralyzed the stock market for 17 years
That's exactly what Buffett highlights in a famous article in Fortune in 1999, where he focuses on two 17 years.
From 1964 to 1981, there was no big gain from investing in the US stock market. In fact, no one looks at the price trend alone. The Dow Jones index stood at the entrance to 1982 in the same place as at the entrance to 1965. This despite the fact that US GDP rose by 370%. during this 17-year period - that is, almost a five-fold.
Nevertheless, the shares did not rock out of the place. The explanation is in Buffetts optics the interest rate development. When assessing the price and the potential for investing in equities, one must compare with what one could get out of a risk-free investment in government bonds. There must be a risk premium to invest in the more risky stocks and this must be reflected in the price.
If the yield on government bonds rises, the price of shares must fall so that it is in line with the expected earnings of the companies. It becomes more expensive for companies to borrow money, which can be seen on earnings - and investors' desire and opportunity to invest in shares is getting worse. The stock prices before the interest rate increase will therefore be too high - so they fall. Just as stock prices will increase if interest rates fall.
The interest rate on long government securities rose from 1964 to 1981 from 4 per cent. to over 15%, and according to Buffer's view, it is the primary explanation for the miserable performance of the shares in the 17 years.
The fall in interest rates caused the shares to rise dramatically in the 17 years
But with the 70's oil crises at a distance and a more targeted battle to get inflation under control of the US Federal Reserve's Paul Volcker headquarters, the picture was quite different over the next 17 years from 1982 to 1998.
The long-term interest rate fell drastically and was at the end of 1998 of 5 per cent. Had 1981 invested 1 million. dollars in an 30 year 14% US Treasury bonds and regularly reinvested coupon payments would be $ 8.181.219 at the end of 1998, Buffetts calculations in the article show from 1999. An annual return of more than 13 per cent
But the shares would have given even more. In the 17 years, the Dow index almost doubled in the 10, while GDP was less than tripled - GDP growth was thus somewhat less than the 370%. in the previous 17 year period. 1 million dollars invested in the Dow index in 1981 with continuous reinvestment of all dividends, would have grown to 1998 dollars at the end of XIX. an annual return of 19.720.112 per cent
The main explanation for the behavior of the shares is, as in the previous 17 year period, the interest rate trend - this time the massive falling interest, Buffett believes.
But also the companies' earnings after tax. Buffet points out that earnings up to 1981 typically fluctuated in a range of 4-6,5%. of GDP. But the trend was downwards towards the 80s, and in 1982 the figure was 3,5%. of GDP. But then came the fall in interest rates and the good times, which among other things meant that the number in 1998 was close to 6%.
Buffet's expectations for 1999X
In 1999, where Buffett presents these views, the Internet bubble is at its peak. And many are looking a little crookedly about the obscured investor who obviously has not understood the importance of information technology. But he was ashamed. He firmly believed that there was a revolution in information on the way. But what he didn't believe was the expectations for the IT shares.
Just as he did not let himself be seduced by the fact that the past 17 years had almost 10 doubled the Dow index. Of course, this was not something that would continue. The stock market was overvalued, and Buffett cites in the article a survey showing that investors expected annual returns of 1999 and 10 years ahead of 13-22,6%. As he said, it was an expression that they looked in the rear view mirror rather than looking out through the windshield.
"Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 12 years perform anything like - anything like - they've performed in the past. . If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate - repeat, aggregate - would earn in a world of constant interest rates, 17% inflation and those ever hurtful frictional costs. .If you outflow the inflation component from this nominal return (which you would need to do, however, inflation fluctuates), that's 17% in real terms. And if 2% is wrong, I believe that the percentage is just as likely to be less than more. "
Seeking for Alpha in December 2015 looked at the developments in the US stock market since 1999 and concludes that adjusted for inflation and taking into account ongoing reinvestments of dividends, the real return has been 34%. yearly. Buffett was right.
It's hard to get rich with technological innovations
But in reality, these numbers are not so much interesting. It is even more interesting to hear about Buffett's view of new innovations. Technological development is exponential and will surely revolutionize society on many fronts over the next few decades to the extent that no one is able to predict precisely. But it's not that easy for investors to get rich in technological revolutions.
Buffett mentions two of the inventions that have been most important to society in the NUMBER. century. The car and the plane.
In the US alone, there have been at least 2000 car manufacturers over the years in an industry that has a tremendous influence on our lives. One would think that if you had been able to look into the future then the automotive industry would be seen as an obvious way to get rich through equity investment.
But at that time, Buffett noted that there were three American car manufacturers left in an industry that had a huge impact on the US community. But not on investors' returns, which also needed quite a lot of luck to hit the surviving companies.
Buffett points out that in something resembling a societal revolution, it can sometimes be much easier to spot the losers - and he is annoyed that the Buffett family who reprimanded the car's invention was not foreseeable enough to go short in horses.
Another revolution in the 20. century was the invention of the airplane. The aviation industry has also dramatically changed the world, but it has not been the money machines for the airlines or the airline manufacturers - only a few have survived.
“The other truly transforming business of the first quarter of the century, besides the car, was the airplane – another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful of still breathing today. Among the plans made then - have been the Silicon Valley of that age - both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraska no longer relies upon. Move on to failures of airlines. Here's a list of airlines that have been filing for bankruptcy. Continental was smart enough to make that list twice. If or 129, in fact – though the picture would have improved since then - the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero. ”
Similarly, revolutions in the last century with the invention of radio and television failed to deliver gold-edged returns to investors.
Which brings Buffett to an important point:
“I will draw a lesson from these businesses: The key to investing is not assessing how much the industry is going to affect society, or how much it will grow, but rather the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
Conference in Sun Valley
The famous article in Fortune was written by Carol Loomis. Not as an interview with Buffett, but because she had heard then in 1999 that Buffett against custom had stood up and talked about the general stock market and the long-term outlook for stocks at very rich people events. It happened four times that year, and Loomis watched one of them and watched another video. It is on this basis that the article is written - and otherwise reviewed and approved by Buffett.
In the book The Snowball: Warren Buffett and the Business of Life - A biography of the Buffet - describes it very vividly how Buffett presents his views on a conference in Sun Valley for very, very rich people. Some of the participants were people who had created recent fortunes on businesses and ideas related to the so-called internet. They knew everything.
Until Buffett took the stand on the last day - and made his first stock market forecast for 30 years.
Read one excerpt from the book here, it's fabulous entertainment.