巴菲特论股票市场
我上一次谈及这个话题是在1999年。当时我把过去的34年分成2个17年的周期，这两个周期惊人的对称，分别对应的是股票市场的荒年与丰年。
先看第一个周期。你可以看出，在17年里道琼斯指数刚好增长了0.1%。
道琼斯工业指数
1964年12月31日：874.12
1981年12月31日：875.00
下面是第二个周期。这一周期标志着一个令人难以置信的牛市。这一牛市在我上次提出这一想法的时候已经接近尾声。（虽然我当时并不知道。）
道琼斯工业指数
1981年12月31日：875.00
1998年12月31日：9181.43
你不能用GNP（国民生产总值）增长的差别来解释这两个周期里股市的背离。在第一个周期，虽然股市惨淡，但是GNP增速是后一个周期的两倍。
GNP增加
1964-1981:373%
1981-1998:177%
那么什么才是解释？我认为股票市场在两个周期里截然相反的变化是由两个重要的经济变量的重大改变所引起。同时，一种相关的心理上的力量也对市场变化最终发生作用。
让我再次提醒你“投资”的定义。这个定义虽然简单，但是常常被忘记。投资是今天花钱，明天收到更多的钱。
这就触及了在两个周期里影响了股价的第一个经济变量——利率。在经济学上，利率的作用就好像是物质世界的重力。在所有时候，在所有市场，在世界所有地方，利率的微小变化会改变所有金融资产的价值。这你在债券价格的波动中可以清晰地看到。但是，这条规律也适用于农田、石油储量、股票和任何其他的金融资产。而且，对价值的影响可以是巨大的。如果利率是13%，以当前价值计算，你从投资中获得的未来收益将比不上利率是4%时候的未来收益。
下面就是在34年的时期里几个关键日期的利率。在上半个时期利率急剧升高——这对投资者不利。在下半个时期利率急剧下降——这对投资者是福音。
长期政府债券利率
Dec. 31, 1964:4.20%
Dec. 31, 1981:13.65%
Dec. 31, 1998:5.09%
另外一个重要的经济变量就是投资者预期从投资的公司中将获得多少回报。在第一个周期，由于公司盈利不佳，这个预期急剧下降。但是在80年代初，美联储主席PaulVolcker强有力的经济措施实际上把企业盈利能力推高到了30年代以来前所未见的高度。
关键在于，在第一个周期，投资者对美国经济丧失了信心。他们展望未来，相信未来将被两个负面因素困扰。首先，他们不看好企业盈利。其次，高利率盛行让他们把企业可怜的盈利又进一步打了折扣。这两个因素作用在一起，导致了1964-1981年股票市场的滞胀。虽然在这个时期GNP有了很大的增长。这个国家的实业在增长，但是投资者对这些实业的估值在萎缩。
而这两个因素的逆转则创造了一个低GNP增长伴随着股市兴旺的时期。首先，盈利能力大大提高。其次，利率大降，使未来盈利更加有价值。这两个现象都是大牛市的真实而强大的刺激。我提到的一个心理因素也恰巧起了作用：投机交易爆炸性增长。这仅仅是由于人们看到了市场的行动。后面，我们会对这种股票市场上危险的周期性疾病作病理分析。
两年前，我认为有利的基本趋势已经走到了尽头。市场要从当时的位置急剧上升，长期利率必须进一步下降（这总是有可能的），或者，企业盈利能力要有重大改善（这在当时看起来非常不太可能）。如果你看一下50年来企业税后盈利占GDP的比例图，就会发现这个比例一般在4%，比如1981年这样的差年景，到6.5%左右。这个比例超过6.5%很少见。在盈利非常好的1999年和2000年，这个比例低于6%，而今年可能会低于5%以下。
你已经有了我对两个截然不同的17年周期的解释。问题是，股票市场的过去能在多大程度上能告诉我们股市的未来?
为了启发答案，我先回顾一下20世纪。众所周知，这个世纪确实是美国的世纪。我们有汽车的出现，我们有飞机，我们有无线电、电视和电脑。这是一个不可思议的时期。确实，按美元计，美国人均产出的实际增长（没有通货膨胀的影响）达到了惊人的702%。
当然，这个世纪也包括了一些艰难的年份，比如大萧条的1929-1933年。但是，一个一个10年的看美国的人均GNP，你会发现一个令人吃惊的现象：作为一个国家，我们在本世纪保持了一致的进步。你可能会想，美国的经济价值，至少用美国的证券市场来衡量，也会以相当一致的节奏增长。
美国从未停止增长
在20世纪早期美国人均GNP的增长较慢。但是如果你把美国看作一个股票，总体而言，它应该是快速成长股。
年份 20世纪人均GNP增长（不变美元）
1900-10 29%
1910-20 1%
1920-30 13%
1930-40 21%
1940-50 50%
1950-60 18%
1960-70 33%
1970-80 24%
1980-90 24%
1990-2000 24%
但是，并不是这样。从我们之前对1964-1981期间的研究可以知道，在那段时期，经济与股市这两者的对应被完全打破了。但是，整个世纪也是这样的。在开始的时候，比如1900年到1920年，这个国家在突飞猛进，爆炸性的扩展对电力、汽车、电话的应用。但是，股票市场几乎没动，只录得了0.4%的年度增长。这和1964-1981年间的停滞很相似。
道琼斯工业指数
1899年12月31日：66.08
1920年12月31日：71.95
在下一个阶段，我们有20年代的市场繁荣。道琼斯工业指数增长了430%，在1929年9月达到了381点。之后的19年，整整19年后，道琼斯工业指数在177点，只有开始时的一半。但是40年代美国人均GDP增长50%，是20世纪增长最快的10年。下面的17年，股票终于开始上涨，有了5比1的增长。然后就是我们开始讨论的两个周期：1964年到1981年的滞胀；以及1981到20世纪末的大牛市。
从另一个角度看，我们有3个长期的巨大的牛市，历时44年，期间道琼斯工业指数增长了一万一千点。我们也有3个滞胀时期，历时56年。在这56年中，美国经历了重大的经济进步，但是道琼斯工业指数却实际上掉了292点。
怎么会这样呢？一个欣欣向荣的国家，每个人都集中精力挣钱，却怎么会有3个长期而痛苦的滞胀时期呢？在这期间，除了分红，股票市场会让你亏钱。答案就在于投资者反复犯的错误，在于我在前面提到的一种心理因素：人们习惯性的被后视镜所误导，尤其是刚刚过去的情况。
这个世纪的第一个阶段就是这种短视的鲜明体现。在这个世纪的头20年，股票的股息率一般超过高等级债券的利息。这种关系现在看起来很奇怪，在那是却几乎就是公理。当时的观念是：众所周知，股票风险更高，除非获得更高回报，为什么要买股票呢？
然后，就有了一本1924年的书。这本书很薄，一开始毫无征兆，但却注定以前所未有的方式改变了股票市场。这本书的作者是埃德加·劳伦斯·史密斯。书名叫做《普通股作为长期投资》。这本书记录了史密斯在截止到1922年的56年间对证券价格变化所作的研究。史密斯的研究始于一个假设：股票在通货膨胀时期表现更好；债券在通货紧缩时期表现更佳。这是一个完全合理的假设。
但是，考虑一下这本书的第一句话：“这本书是对一个失败的记录——失败在于事实无法支持一个预先想好的理论。”史密斯接着说道：“但是，所收集的事实看起来值得进一步研究。如果这些实事无法证明我们希望证实的东西，那么让这些事实带领我们，看看他们会带给我们什么。”
史密斯是一个聪明的人。他做了世界上最难的事情。达尔文曾经说过，无论何时，当他找到一个与他珍视的结论所相反的事情时，他有义务在30分钟内写下新的发现。否则，他的头脑就会像身体排斥移植器官一样拒绝不一致的信息。人类本能的趋势就是坚守自己所相信的东西，尤其是刚刚被证明的最近的经历。这一我们自身的缺陷造成了长久的牛市和长期的滞胀。
为了说明埃德加·劳伦斯·史密斯的发现，我在此引用传奇的思想家约翰·梅纳德·凯恩斯的原话。在1925年，经济学家凯恩斯评论了这本书，因此让这本书出名。在评论中，凯恩斯写道“史密斯先生最重要的一点，肯定也是最具创新的一点，可能就是：管理良好的工业企业一般不把所有盈利分发给股东。如果不是所有时候，至少在好的年景，企业会保留一部分盈利然后再投回到业务中去。因此这就有了复利的成分（凯恩斯加注斜体）运营支持良好的工业投资。”
就这么简单。这其实都不是什么新闻。人们当然知道公司不会付出100%的盈利。但是，人们从来没想过这一点意味着什么。但是，史密斯先生却说“为什么股票一般表现超过债券？一个主要原因就在于公司存留盈利，这些存留盈利将产生更多的盈利和分红。”
这一发现点燃了一个前所未有的牛市。投资者被史密斯的见解所激发，纷纷投入股市，并预期双重回报：不仅有高于债券收益率的股息率，而且有增长。对于美国公众来说，这一新的理解就像火的发现一样。
但是不久这些公众就被这火灼伤了。股价被推高，首先使股息率低于债券收益率，最终，高涨的股价使股息率远低于债券收益率。下面发生的事情将会让读者很熟悉：股价上涨如此之快，以至于股价上涨成了人们涌入股市的主要动力。少数人在1925年由于正确的原因购买了股票。而多数人在1929年由于错误的原因购买了股票。
在1925年的书评里，凯恩斯敏锐的预见到了这种股市不正常的现象。他写道：“这是危险的。除非能够从过去的经历中找出广义的原因，基于过去的经历而对未来所作的归纳推理是危险的。”凯恩斯说，如果你无法从过去的经历中找到广义的原因，你就可能陷入预期的陷阱。在这种情况下，对未来的预期只有在各种条件与过去完全一样时才能实现。这种特殊的条件就指的是史密斯对股票市场半个世纪的研究所发现的股息率高于债券收益率的事实。
投资者在20年代作出了巨大的误判，此后这种误判又以不同形式重复了很多次。公众对20年代股票市场的疯狂一直心有余悸，直到1948年。此时，这个国家的内在价值远超过之前的20年。股息率是债券收益率的2倍多。但是，股价却不到1929年峰值的一半。造成史密斯的神奇的结果的条件重新出现了，而且广泛存在。但是，投资者对这一切视而不见。他们已经被30年代早期可怕的股市吓得呆若木鸡，对痛苦唯恐躲避不及。
不要认为小投资者才过多的看后视镜。让我们看看专业管理的退休基金在近几十年的表现。在1971年，那时股市高涨，退休基金经理感觉良好。他们把90%的净现金流投入了股市，在当时是创纪录的投入。但是，几年后市场大跌，股价变得非常便宜。退休基金经理又作了什么呢？他们停止买股票，因为股票变得便宜了。
私人退休基金现金流投入股票的百分比
1971:91%(创纪录的高点)
1974: 13%
这种事我从来都难以理解。举一个我自己的例子：我余下的这辈子都会买汉堡。当汉堡降价时，我们高兴之极。当汉堡涨价时，我们痛哭流涕。对大多数人来说，在生活中买任何东西都是这样的，除了股票。当股价下跌时同样的钱可以买更多股票，但人们却不喜欢这样了。
当退休基金经理也这么做时，这种行为就更加难以理解。他们比任何投资者都有更长的投资期。他们的基金明天不需要钱，明年也不需要钱，甚至下个10年也不需要钱。所以他们有完全的自由放松心情。由于他们不是在运营自己的钱，贪婪不应该使他们的决策扭曲。他们应该只想着什么是最合理的。但是他们的表现却像业余投资者一样（但是他们却是拿钱的，好像他们有着特殊的专业技能）。
1979年，当我感觉股票非常便宜时，我写了一篇文章。我写道“退休基金经理仍把眼睛盯在后视镜上作投资决策。这种‘依据上一场战争而打仗的将军’式的投资方式在过去被证明代价巨大，这次也将被证明代价巨大。”这是因为“股票现在的价位应该产生远远超过债券的长期投资回报。”
考虑一下1972年的情况。当退休基金经理还在买股票时，道琼斯工业指数在年底达到了1020点，而净资产为625，净资产回报率为11%。6年后，道琼斯便宜了20%，而净资产增长了接近40%，净资产回报率为13%。当时我写道：“股票在1978年确实很便宜，退休基金经理们却不愿意买。而在1972年当股票很贵时，基金经理却以创纪录的方式购买。”
当我写这篇文章时，公司债券的收益率为9.5%。所以我问了一个很明显的问题：“1999年到期的收益率9.5%的20年期优质美国公司债券能超过以净资产价格购买，而净资产收益率为13%的类似道琼斯指数的一类公司吗？”这个问题不言自明。
如果你读了我1979年的文章，你会受损失。你怎么会在接下来的3年受损失呢？我并不擅长预测短期股市变化，现在也不擅长。我从来不知道股票市场在未来6个月，或者1年，甚至2年走势如何。
但是，我认为预见到长期将会发生什么很容易。本·格雷厄姆告诉过我们为什么：“短期内股票市场是一个投票机器。长期来讲，股票市场是一个称重机器。”恐惧与贪婪在投票时起重要的作用，但在“称”上却毫无作用。
依照我的思路，以下的事实并不难解释。在20年的时间里一个收益率9.5%的债券无法比得过这种称作道琼斯的“伪装债券”。这种债券利息13%，而你可以在面值以下购买，也就是低于净资产购买。
让我解释一下我所说的“伪装债券”的意思。众所周知，一般的债券有一定的到期时间和一系列的小的债息。比如一个债息率为6%的债券每6个月发3%的债息。
而股票则与之相反，是对某一公司未来收益所有权的金融工具。这种收益也许是股息、股票回购、公司被卖掉或者清算。这些付款实际上就是“债息”。随着股东的变化，收取债息的所有人会变。但是，作为一个整体，公司的所有人的财务收益决定于这些“债息”的多少和时机。投资分析完全就是估计这些“债息”的多少和时机。
现在，估计个别股票的“债息”多少非常困难。但是，估计几组股票的“债息”容易一些。前面我提到，在1978年，道琼斯工业股票平均净资产850美金，净资产回报率13%。这13%只能是参考，而不是保证。但是，如果你愿意投资一段时间股票，你实际上是在买债券。而且购买价格在1979年很少超过面值。本金价值891美金，债券利息很有可能是本金的13%。
这样怎么能不比9.5%的债券好？从那个起始点，股票的长期业绩一定会超越债券。巧的是，这在我商业生涯的大部分时间都是对的。但是，就像凯恩斯告诫我们的那样，股票的优势不是必然的。只有当一定条件满足时，股票才拥有优势。
让我再展示给你退休基金的羊群效应思维方式的另外一点。这一点恐怕由于管理这些基金的人的一点自身私利而得到了加强。下面的表格是四家著名的公司，他们非常典型。表格里是他们所用的退休基金资产的预期回报。这些回报用来计算每年退休基金的费用（或收入）。
多变的观点
投资者要以超越美国实体经济发展的速度增加财富，这个比率必须不断持续上升再上升。如果GNP每年增加5%，而你想要股票市值增加10%，那么这条曲线需要直线上升，直至超出图表的范围。那种情况不会发生。
对我来说，这个图的信息是：如果这个比率关系在70%或80%附近，购买股票将会不错。如果这个比率接近200%，就像1999年和2000年的一段时间里的情况，那你就是在玩火。你可以看到，最近，这个比例是133%。
即使这样，这还是从1999年的高点的大跌了很多的结果。我在1999年提出：美国公众应该预期在未来10到20年股票的回报为7%（包括股票和2%的通货膨胀假设）。这只是一个粗的数字，还没算上摩擦成本，比如佣金和费用。净回报应该可能是6%。
今天，股票市场的“汉堡”更便宜了。这个国家的经济在发展，而股票价格更低了。这意味着投资者用同样的钱得到的更多。我现在预计除去成本股票长期回报为7%左右。这挺不错的，除非你还用过去的90年代来推导你对未来的预期。
原文：
http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/
Warren Buffett On The StockMarket
What's in the future for investors--another roaring bullmarket or more upset stomach? Amazingly, the answer may come downto three simple factors. Here, the world's most celebrated investortalks about what really makes the market tick--and whether thatticking should make you nervous.
(FORTUNE Magazine)
By Warren Buffett; Carol Loomis
December 10, 2001
(FORTUNE Magazine) – Two years ago, following a July 1999speech by Warren Buffett, chairman of Berkshire Hathaway, on thestock market--a rare subject for him to discuss publicly--FORTUNEran what he had to say under the title "Mr. Buffett on the StockMarket" (Nov. 22, 1999). His main points then concerned twoconsecutive and amazing periods that American investors hadexperienced, and his belief that returns from stocks were due tofall dramatically. Since the Dow Jones Industrial Average was 11194when he gave his speech and recently was about 9900, no one yet hasthe goods to argue with him.
So where do we stand now--with the stock market seeming toreflect a dismal profit outlook, an unfamiliar war, and rattledconsumer confidence? Who better to supply perspective on thatquestion than Buffett?
The thoughts that follow come from a second Buffett speech,given last July at the site of the first talk, Allen & Co.'sannual Sun Valley bash for corporate executives. There, therenowned stockpicker returned to the themes he'd discussed before,bringing new data and insights to the subject. Working withFORTUNE's Carol Loomis, Buffett distilled that speech into thisessay, a fitting opening for this year's Investor's Guide. Hereagain is Mr. Buffett on the Stock Market.
The last time I tackled this subject, in 1999, I broke downthe previous 34 years into two 17-year periods, which in the senseof lean years and fat were astonishingly symmetrical. Here's thefirst period. As you can see, over 17 years the Dow gained exactlyone-tenth of one percent.
Dow Jones Industrial Average
? Dec. 31, 1964: 874.12
? Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull marketthat, as I laid out my thoughts, was about to end (though I didn'tknow that).
Dow Jones Industrial Average
? Dec. 31, 1981: 875.00
? Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence inmarkets by, say, differences in the growth of gross nationalproduct. In the first period--that dismal time for the market--GNPactually grew more than twice as fast as it did in the secondperiod.
Gain in Gross National Product
? 1964-1981: 373%
? 1981-1988: 177%
So what was the explanation? I concluded that the market'scontrasting moves were caused by extraordinary changes in twocritical economic variables--and by a related psychological forcethat eventually came into play.
Here I need to remind you about the definition of "investing,"which though simple is often forgotten. Investing is laying outmoney today to receive more money tomorrow.
That gets to the first of the economic variables that affectedstock prices in the two periods--interest rates. In economics,interest rates act as gravity behaves in the physical world. At alltimes, in all markets, in all parts of the world, the tiniestchange in rates changes the value of every financial asset. You seethat clearly with the fluctuating prices of bonds. But the ruleapplies as well to farmland, oil reserves, stocks, and every otherfinancial asset. And the effects can be huge on values. If interestrates are, say, 13%, the present value of a dollar that you'regoing to receive in the future from an investment is not nearly ashigh as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our34-year span. They moved dramatically up--that was bad forinvestors--in the first half of that period and dramaticallydown--a boon for investors--in the second half.
Interest rates, Long-term government bonds
? Dec. 31, 1964: 4.20%
? Dec. 31, 1981: 13.65%
? Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investorsexpected to get from the companies in which they invested. Duringthe first period expectations fell significantly because corporateprofits weren't looking good. By the early 1980s Fed Chairman PaulVolcker's economic sledgehammer had, in fact, driven corporateprofitability to a level that people hadn't seen since the1930s.
The upshot is that investors lost their confidence in theAmerican economy: They were looking at a future they believed wouldbe plagued by two negatives. First, they didn't see much goodcoming in the way of corporate profits. Second, the sky-highinterest rates prevailing caused them to discount those meagerprofits further. These two factors, working together, causedstagnation in the stock market from 1964 to 1981, even though thoseyears featured huge improvements in GNP. The business of thecountry grew while investors' valuation of that businessshrank!
And then the reversal of those factors created a period duringwhich much lower GNP gains were accompanied by a bonanza for themarket. First, you got a major increase in the rate ofprofitability. Second, you got an enormous drop in interest rates,which made a dollar of future profit that much more valuable. Bothphenomena were real and powerful fuels for a major bull market. Andin time the psychological factor I mentioned was added to theequation: Speculative trading exploded, simply because of themarket action that people had seen. Later, we'll look at thepathology of this dangerous and oft-recurring malady.
Two years ago I believed the favorable fundamental trends hadlargely run their course. For the market to go dramatically up fromwhere it was then would have required long-term interest rates todrop much further (which is always possible) or for there to be amajor improvement in corporate profitability (which seemed, at thetime, considerably less possible). If you take a look at a 50-yearchart of after-tax profits as a percent of gross domestic product,you find that the rate normally falls between 4%--that was itsneighborhood in the bad year of 1981, for example--and 6.5%. Forthe rate to go above 6.5% is rare. In the very good profit years of1999 and 2000, the rate was under 6% and this year it may well fallbelow 5%.
So there you have my explanation of those two wildly different17-year periods. The question is, How much do those periods of thepast for the market say about its future?
To suggest an answer, I'd like to look back over the 20thcentury. As you know, this was really the American century. We hadthe advent of autos, we had aircraft, we had radio, TV, andcomputers. It was an incredible period. Indeed, the per capitagrowth in U.S. output, measured in real dollars (that is, with noimpact from inflation), was a breathtaking 702%.
The century included some very tough years, of course--likethe Depression years of 1929 to 1933. But a decade-by-decade lookat per capita GNP shows something remarkable: As a nation, we maderelatively consistent progress throughout the century. So you mightthink that the economic value of the U.S.--at least as measured byits securities markets--would have grown at a reasonably consistentpace as well.
That's not what happened. We know from our earlier examinationof the 1964-98 period that parallelism broke down completely inthat era. But the whole century makes this point as well. At itsbeginning, for example, between 1900 and 1920, the country waschugging ahead, explosively expanding its use of electricity,autos, and the telephone. Yet the market barely moved, recording a0.4% annual increase that was roughly analogous to the slimpickings between 1964 and 1981.
Dow Industrials
? Dec. 31, 1899: 66.08
? Dec. 31, 1920: 71.95
In the next period, we had the market boom of the '20s, whenthe Dow jumped 430% to 381 in September 1929. Then we go 19years--19 years--and there is the Dow at 177, half the level whereit began. That's true even though the 1940s displayed by far thelargest gain in per capita GDP (50%) of any 20th-century decade.Following that came a 17-year period when stocks finally tookoff--making a great five-to-one gain. And then the two periodsdiscussed at the start: stagnation until 1981, and the roaring boomthat wrapped up this amazing century.
To break things down another way, we had three huge, secularbull markets that covered about 44 years, during which the Dowgained more than 11,000 points. And we had three periods ofstagnation, covering some 56 years. During those 56 years thecountry made major economic progress and yet the Dow actually lost292 points.
How could this have happened? In a flourishing country inwhich people are focused on making money, how could you have hadthree extended and anguishing periods of stagnation that inaggregate--leaving aside dividends--would have lost you money? Theanswer lies in the mistake that investors repeatedly make--thatpsychological force I mentioned above: People are habitually guidedby the rear-view mirror and, for the most part, by the vistasimmediately behind them.
The first part of the century offers a vivid illustration ofthat myopia. In the century's first 20 years, stocks normallyyielded more than high-grade bonds. That relationship now seemsquaint, but it was then almost axiomatic. Stocks were known to beriskier, so why buy them unless you were paid a premium?
And then came along a 1924 book--slim and initiallyunheralded, but destined to move markets as never before--writtenby a man named Edgar Lawrence Smith. The book, called Common Stocksas Long Term Investments, chronicled a study Smith had done ofsecurity price movements in the 56 years ended in 1922. Smith hadstarted off his study with a hypothesis: Stocks would do better intimes of inflation, and bonds would do better in times ofdeflation. It was a perfectly reasonable hypothesis.
But consider the first words in the book: "These studies arethe record of a failure--the failure of facts to sustain apreconceived theory." Smith went on: "The facts assembled, however,seemed worthy of further examination. If they would not prove whatwe had hoped to have them prove, it seemed desirable to turn themloose and to follow them to whatever end they might lead."
Now, there was a smart man, who did just about the hardestthing in the world to do. Charles Darwin used to say that wheneverhe ran into something that contradicted a conclusion he cherished,he was obliged to write the new finding down within 30 minutes.Otherwise his mind would work to reject the discordant information,much as the body rejects transplants. Man's natural inclination isto cling to his beliefs, particularly if they are reinforced byrecent experience--a flaw in our makeup that bears on what happensduring secular bull markets and extended periods ofstagnation.
To report what Edgar Lawrence Smith discovered, I will quote alegendary thinker--John Maynard Keynes, who in 1925 reviewed thebook, thereby putting it on the map. In his review, Keynesdescribed "perhaps Mr. Smith's most important point ... andcertainly his most novel point. Well-managed industrial companiesdo not, as a rule, distribute to the shareholders the whole oftheir earned profits. In good years, if not in all years, theyretain a part of their profits and put them back in the business.Thus there is an element of compound interest (Keynes' italics)operating in favor of a sound industrial investment."
It was that simple. It wasn't even news. People certainly knewthat companies were not paying out 100% of their earnings. Butinvestors hadn't thought through the implications of the point.Here, though, was this guy Smith saying, "Why do stocks typicallyoutperform bonds? A major reason is that businesses retainearnings, with these going on to generate still more earnings--anddividends, too."
That finding ignited an unprecedented bull market. Galvanizedby Smith's insight, investors piled into stocks, anticipating adouble dip: their higher initial yield over bonds, and growth toboot. For the American public, this new understanding was like thediscovery of fire.
But before long that same public was burned. Stocks weredriven to prices that first pushed down their yield to that onbonds and ultimately drove their yield far lower. What happenedthen should strike readers as eerily familiar: The mere fact thatshare prices were rising so quickly became the main impetus forpeople to rush into stocks. What the few bought for the rightreason in 1925, the many bought for the wrong reason in 1929.
Astutely, Keynes anticipated a perversity of this kind in his1925 review. He wrote: "It is dangerous...to apply to the futureinductive arguments based on past experience, unless one candistinguish the broad reasons why past experience was what it was."If you can't do that, he said, you may fall into the trap ofexpecting results in the future that will materialize only ifconditions are exactly the same as they were in the past. Thespecial conditions he had in mind, of course, stemmed from the factthat Smith's study covered a half century during which stocksgenerally yielded more than high-grade bonds.
The colossal miscalculation that investors made in the 1920shas recurred in one form or another several times since. Thepublic's monumental hangover from its stock binge of the 1920slasted, as we have seen, through 1948. The country was thenintrinsically far more valuable than it had been 20 years before;dividend yields were more than double the yield on bonds; and yetstock prices were at less than half their 1929 peak. The conditionsthat had produced Smith's wondrous results had reappeared--inspades. But rather than seeing what was in plain sight in the late1940s, investors were transfixed by the frightening market of theearly 1930s and were avoiding re-exposure to pain.
Don't think for a moment that small investors are the onlyones guilty of too much attention to the rear-view mirror. Let'slook at the behavior of professionally managed pension funds inrecent decades. In 1971--this was Nifty Fifty time--pensionmanagers, feeling great about the market, put more than 90% oftheir net cash flow into stocks, a record commitment at the time.And then, in a couple of years, the roof fell in and stocks got waycheaper. So what did the pension fund managers do? They quit buyingbecause stocks got cheaper!
Private Pension Funds % of cash flow put into equities
? 1971: 91% (record high)
? 1974: 13%
This is the one thing I can never understand. To refer to apersonal taste of mine, I'm going to buy hamburgers the rest of mylife. When hamburgers go down in price, we sing the "HallelujahChorus" in the Buffett household. When hamburgers go up, we weep.For most people, it's the same way with everything in life theywill be buying--except stocks. When stocks go down and you can getmore for your money, people don't like them anymore.
That sort of behavior is especially puzzling when engaged inby pension fund managers, who by all rights should have the longesttime horizon of any investors. These managers are not going to needthe money in their funds tomorrow, not next year, nor even nextdecade. So they have total freedom to sit back and relax. Sincethey are not operating with their own funds, moreover, raw greedshould not distort their decisions. They should simply think aboutwhat makes the most sense. Yet they behave just like rank amateurs(getting paid, though, as if they had special expertise).
In 1979, when I felt stocks were a screaming buy, I wrote inan article, "Pension fund managers continue to make investmentdecisions with their eyes firmly fixed on the rear-view mirror.This generals-fighting-the-last-war approach has proved costly inthe past and will likely prove equally costly this time around."That's true, I said, because "stocks now sell at levels that shouldproduce long-term returns far superior to bonds."
Consider the circumstances in 1972, when pension fund managerswere still loading up on stocks: The Dow ended the year at 1020,had an average book value of 625, and earned 11% on book. Six yearslater, the Dow was 20% cheaper, its book value had gained nearly40%, and it had earned 13% on book. Or as I wrote then, "Stockswere demonstrably cheaper in 1978 when pension fund managerswouldn't buy them than they were in 1972, when they bought them atrecord rates."
At the time of the article, long-term corporate bonds wereyielding about 9.5%. So I asked this seemingly obvious question:"Can better results be obtained, over 20 years, from a group of9.5% bonds of leading American companies maturing in 1999 than froma group of Dow-type equities purchased, in aggregate, around bookvalue and likely to earn, in aggregate, about 13% on that bookvalue?" The question answered itself.
Now, if you had read that article in 1979, you would havesuffered--oh, how you would have suffered!--for about three years.I was no good then at forecasting the near-term movements of stockprices, and I'm no good now. I never have the faintest idea whatthe stock market is going to do in the next six months, or the nextyear, or the next two.
But I think it is very easy to see what is likely to happenover the long term. Ben Graham told us why: "Though the stockmarket functions as a voting machine in the short run, it acts as aweighing machine in the long run." Fear and greed play importantroles when votes are being cast, but they don't register on thescale.
By my thinking, it was not hard to say that, over a 20-yearperiod, a 9.5% bond wasn't going to do as well as this disguisedbond called the Dow that you could buy below par--that's bookvalue--and that was earning 13% on par.
Let me explain what I mean by that term I slipped in there,"disguised bond." A bond, as most of you know, comes with a certainmaturity and with a string of little coupons. A 6% bond, forexample, pays a 3% coupon every six months.
A stock, in contrast, is a financial instrument that has aclaim on future distributions made by a given business, whetherthey are paid out as dividends or to repurchase stock or to settleup after sale or liquidation. These payments are in effect"coupons." The set of owners getting them will change asshareholders come and go. But the financial outcome for thebusiness' owners as a whole will be determined by the size andtiming of these coupons. Estimating those particulars is whatinvestment analysis is all about.
Now, gauging the size of those "coupons" gets very difficultfor individual stocks. It's easier, though, for groups of stocks.Back in 1978, as I mentioned, we had the Dow earning 13% on itsaverage book value of $850. The 13% could only be a benchmark, nota guarantee. Still, if you'd been willing then to invest for aperiod of time in stocks, you were in effect buying a bond--atprices that in 1979 seldom inched above par--with a principal valueof $891 and a quite possible 13% coupon on the principal.
How could that not be better than a 9.5% bond? From thatstarting point, stocks had to outperform bonds over the long term.That, incidentally, has been true during most of my businesslifetime. But as Keynes would remind us, the superiority of stocksisn't inevitable. They own the advantage only when certainconditions prevail.
Let me show you another point about the herd mentality amongpension funds--a point perhaps accentuated by a littleself-interest on the part of those who oversee the funds. In thetable below are four well-known companies--typical of many others Icould have selected--and the expected returns on their pension fundassets that they used in calculating what charge (or credit) theyshould make annually for pensions.
Now, the higher the expectation rate that a company uses forpensions, the higher its reported earnings will be. That's just theway that pension accounting works--and I hope, for the sake ofrelative brevity, that you'll just take my word for it.
As the table shows, expectations in 1975 were modest: 7% forExxon, 6% for GE and GM, and under 5% for IBM. The oddity of theseassumptions is that investors could then buy long-term governmentnoncallable bonds that paid 8%. In other words, these companiescould have loaded up their entire portfolio with 8% no-risk bonds,but they nevertheless used lower assumptions. By 1982, as you cansee, they had moved up their assumptions a little bit, most toaround 7%. But now you could buy long-term governments at 10.4%.You could in fact have locked in that yield for decades by buyingso-called strips that guaranteed you a 10.4% reinvestment rate. Ineffect, your idiot nephew could have managed the fund and achievedreturns far higher than the investment assumptions corporationswere using.
Why in the world would a company be assuming 7.5% when itcould get nearly 10.5% on government bonds? The answer is thatrear-view mirror again: Investors who'd been through the collapseof the Nifty Fifty in the early 1970s were still feeling the painof the period and were out of date in their thinking about returns.They couldn't make the necessary mental adjustment.
Now fast-forward to 2000, when we had long-term governments at5.4%. And what were the four companies saying in their 2000 annualreports about expectations for their pension funds? They were usingassumptions of 9.5% and even 10%.
I'm a sporting type, and I would love to make a large bet withthe chief financial officer of any one of those four companies, orwith their actuaries or auditors, that over the next 15 years theywill not average the rates they've postulated. Just look at themath, for one thing. A fund's portfolio is very likely to beone-third bonds, on which--assuming a conservative mix of issueswith an appropriate range of maturities--the fund cannot todayexpect to earn much more than 5%. It's simple to see then that thefund will need to average more than 11% on the two-thirds that's instocks to earn about 9.5% overall. That's a pretty heroicassumption, particularly given the substantial investment expensesthat a typical fund incurs.
Heroic assumptions do wonders, however, for the bottom line.By embracing those expectation rates shown in the far right column,these companies report much higher earnings--much higher--than ifthey were using lower rates. And that's certainly not lost on thepeople who set the rates. The actuaries who have roles in this gameknow nothing special about future investment returns. What they doknow, however, is that their clients desire rates that are high.And a happy client is a continuing client.
Are we talking big numbers here? Let's take a look at GeneralElectric, the country's most valuable and most admired company. I'ma huge admirer myself. GE has run its pension fund extraordinarilywell for decades, and its assumptions about returns are typical ofthe crowd. I use the company as an example simply because of itsprominence.
If we may retreat to 1982 again, GE recorded a pension chargeof $570 million. That amount cost the company 20% of its pretaxearnings. Last year GE recorded a $1.74 billion pension credit.That was 9% of the company's pretax earnings. And it was 2 1/2times the appliance division's profit of $684 million. A $1.74billion credit is simply a lot of money. Reduce that pensionassumption enough and you wipe out most of the credit.
GE's pension credit, and that of many another corporation,owes its existence to a rule of the Financial Accounting StandardsBoard that went into effect in 1987. From that point on, companiesequipped with the right assumptions and getting the fundperformance they needed could start crediting pension income totheir income statements. Last year, according to Goldman Sachs, 35companies in the S&P 500 got more than 10% of their earningsfrom pension credits, even as, in many cases, the value of theirpension investments shrank.
Unfortunately, the subject of pension assumptions, criticallyimportant though it is, almost never comes up in corporate boardmeetings. (I myself have been on 19 boards, and I've never heard aserious discussion of this subject.) And now, of course, the needfor discussion is paramount because these assumptions that arebeing made, with all eyes looking backward at the glories of the1990s, are so extreme. I invite you to ask the CFO of a companyhaving a large defined-benefit pension fund what adjustment wouldneed to be made to the company's earnings if its pension assumptionwas lowered to 6.5%. And then, if you want to be mean, ask what thecompany's assumptions were back in 1975 when both stocks and bondshad far higher prospective returns than they do now.
With 2001 annual reports soon to arrive, it will beinteresting to see whether companies have reduced their assumptionsabout future pension returns. Considering how poor returns havebeen recently and the reprises that probably lie ahead, I thinkthat anyone choosing not to lower assumptions--CEOs, auditors, andactuaries all--is risking litigation for misleading investors. Anddirectors who don't question the optimism thus displayed simplywon't be doing their job.
The tour we've taken through the last century proves thatmarket irrationality of an extreme kind periodically erupts--andcompellingly suggests that investors wanting to do well had betterlearn how to deal with the next outbreak. What's needed is anantidote, and in my opinion that's quantification. If you quantify,you won't necessarily rise to brilliance, but neither will you sinkinto craziness.
On a macro basis, quantification doesn't have to becomplicated at all. Below is a chart, starting almost 80 years agoand really quite fundamental in what it says. The chart shows themarket value of all publicly traded securities as a percentage ofthe country's business--that is, as a percentage of GNP. The ratiohas certain limitations in telling you what you need to know.Still, it is probably the best single measure of where valuationsstand at any given moment. And as you can see, nearly two years agothe ratio rose to an unprecedented level. That should have been avery strong warning signal.
For investors to gain wealth at a rate that exceeds the growthof U.S. business, the percentage relationship line on the chartmust keep going up and up. If GNP is going to grow 5% a year andyou want market values to go up 10%, then you need to have the linego straight off the top of the chart. That won't happen.
For me, the message of that chart is this: If the percentagerelationship falls to the 70% or 80% area, buying stocks is likelyto work very well for you. If the ratio approaches 200%--as it didin 1999 and a part of 2000--you are playing with fire. As you cansee, the ratio was recently 133%.
Even so, that is a good-sized drop from when I was talkingabout the market in 1999. I ventured then that the American publicshould expect equity returns over the next decade or two (withdividends included and 2% inflation assumed) of perhaps 7%. Thatwas a gross figure, not counting frictional costs, such ascommissions and fees. Net, I thought returns might be 6%.
Today stock market "hamburgers," so to speak, are cheaper. Thecountry's economy has grown and stocks are lower, which means thatinvestors are getting more for their money. I would expect now tosee long-term returns run somewhat higher, in the neighborhood of7% after costs. Not bad at all--that is, unless you're stillderiving your expectations from the 1990s.
