Warren Buffet appeared this morning on CNBC’s pre-market show, “Squawk Box” and presented a generally upbeat view of the U.S. stock market. In response to a question from Becky Quick about individual investors and how they might get a “fair shake” on Wall Street he replied:
“Well, they pay a lot of expenses in many cases. They don’t need to. They should buy a low-cost index fund and they can participate in the growth of America over the next 20 or 30 or 40 years and they’ll do fine. But if they’re paying high fees to achieve that same result, they’re going to get hurt. They should look very carefully at costs. But they should hold a diversified group of really high-class companies, which you can do by buying an index fund. And then they should forget it. They should just pretend the stock market closes for five years and they shouldn’t look at prices every day…”
After Buffet’s interview, Jim Cramer–co-anchor of “Squawk on the Street” and host of “Mad Money” gushed over how amazing it was that Buffet could be so positive about stocks in the face of the futures predicting a negative opening of the Dow by 58 points this morning. (The Dow by-the-way closed up 38 points today, a rally of almost 100 points from the pre-market futures.)
Buffet is right about long-term investing, of course. And Jim Cramer revealed just how short-term and easily influenced he is by the daily (or intra-day for that matter) price fluctuations of the stock market. The short run shouldn’t and doesn’t matter to long-term investors; and those of us investing for our own accounts have no business being anything other than long-term investors.
I am always interested in buying great companies at discounted prices. That is the essence of value investing. Yet, at turning points Wall Street analysts and commentators are consumed by the bad news. And they almost always caution against buying. Wait, they advise, until things get better–earnings visibility it’s called. But, if we wait for things to visibly get better then every investor can see what we see and it’s too late for a bargain. Value investors generate a significant portion of total return by being willing to buy great companies when they stumble. So, we buy a little in the face of uncertainty. If the stock goes down, we make sure the problem isn’t terminal and we buy a little more. If we are lucky and it goes up–we congratulate ourselves. We don’t chase it. Price matters as Mr. Buffet said. We should view our purchase for what it is: an investment. And, investments are attractive only at certain prices–not at any price–and they usually require time to appreciate.
I like the Oracle of Omaha’s advice: we should buy and then let our investments appreciate–“just pretend the stock market closes for five years” and stop focusing on the daily price movement.