There is a method.
There are reasons for stocks to go up.
Coca-Cola
This is very magic. It’s a magic number,
easy to remember.
Coca-Cola is earning 30 times per share
what they did 32 years ago.
The stock has gone up thirtyfold.
Bethlehem Steel is earning less than they did
30 years ago.
The stock is half its price of 30 years ago.
Stocks are not lottery tickets.
There’s a company behind every stock.
If a company does well,
the stock does well.
It’s not that complicated.
People get too carried away.
First of all, they try to predict the stock market.
That is a total waste of time.
No one can predict the stock market.
They try to predict interest rates.
If anybody can predict interest rates right
three times in a row,
they’d be a billionaire.
Certainly, there’s not that many billionaires
on the planet.
I took logic, syllogism,
when
I studied at Boston College.
There can’t be that many people who can
predict interest rates because
there’d be lots of billionaires,
and no one can predict the economy.
I know a lot of people in this room were around in
1981 and 1982
when we had a 20% prime rate
with double-digit inflation,
double-digit unemployment.
I don’t remember anybody telling me in
1981 about it.
I read. I study all this stuff.
I don’t remember anybody telling me
we’ll have the worst recession since the Depression.
So, what I'm trying to tell you —
It would be very useful
to know what the stock market gonna do.
It would be terrific to know
the Dow Jones average a year from now, would be X,
to know we’ll have a full-scale recession,
or to know interest rates gonna be 12%.
That’s useful stuff.
You never know it, though.
You just don’t get to learn it.
So, I’ve always said if you spend
14 minutes a year on economics,
you’ve wasted 12 minutes.
And I —
I really believe that —
Now, I have to be fair.
I’m talking about economics in the broad scale,
predicting the downturn for next year, or the upturn,
or M1 and M2, 3B.
And all these M's
The —
I'm talking about —
economics to me is when you talk about stock prices.
When I own auto stocks,
I want to know what’s happening to used car prices.
When used car prices going up, it’s a good indicator.
When I own hotel stocks,
I want to know hotel occupancies.
When I own chemical stocks,
I want to know what’s happening to the price of ethylene.
These are facts.
If aluminum inventories go down five straight months,
that’s relevant.
I can deal with that.
I want to know about home affordability,
I want to know about it.
When I own Fannie Mae, or I own a housing stock.
These are facts.
There are economic facts and
there are economic predictions,
and economic predictions are a total waste.
And
interest rates.
Alan Greenspan is a very honest guy.
He would tell you,
that he can’t predict interest rates.
He can tell you what short rates will do in the next six months.
Try and stick him on what
the long-term rate will be three years from now.
He’ll say, “I don’t have any idea.”
So how are you, the investor,
supposed to predict interest rates
if the head of the Federal Reserve can’t do it?
But, you should study history.
And history is the important thing you learn from.
What you learn from history, is the market goes down.
It goes down a lot.
The math is simple.
There have been 93 years this century.
This is easy to do.
The market has had 50 declines
of 10% or more.
So, with 50 declines in 93 years,
about once every two years.
The market falls 10%.
We call that a “correction,” that means —
that's a euphemism for losing a lot of money rapidly.
We call it a correction.
And a —
So, 50 declines in 93 years about once every 2 years,
the market falls 10%.
All those 50 declines — 15 have been 25% or more.
That’s known as a “bear market.”
We’ve had 15 declines in 93 years.
So every six years,
The market's gonna have a 25% decline.
That’s all you need to know.
You need to know the market gonna go down sometimes.
If you’re not ready for that,
you shouldn’t own stocks.
And it's good when it happens.
If you like a stock at $14 and it goes to $6,
that’s great.
You understand the company.
You look at the balance sheet. They’re doing fine.
You're hoping to get to $22 with it; $14 to $22 is terrific,
$6 to $22 is exceptional,
so you take advantage of these declines.
Declines happen, and no one knows when they gonna happen.
People tell you they predicted it, but they predicted it 53 times.
So, you can take advantage of the volatility of the market
if you understand what you own.
Another key element,
is that you have plenty of time.
People are in an unbelievable rush
to buy a stock.
I’ll give you an example of a well-known company.
Walmart went public in October of 1970 —
1970 went public.
It already had a great record
with 15 years’ performance and a great balance sheet.
You could have waited —
10 years. Let's say
you’re a conservative investor.
You’re not sure if Walmart can make it.
You want to check.
You see them operate in small towns. You’re afraid.
They can only make it in seven or eight states.
You want to wait until they go to more states.
You keep waiting.
You could have bought Walmart 10 years after it went public
and made 35 times your money.
If you bought it when they went public,
you would have made 5 or 10 times your money,
but you could have waited 10 years after Walmart went public
and made — over 30 times your money.
You could have waited three years after Microsoft went public
and made 10 times your money.
If you knew something about software —
I know nothing about software.
If you knew something about software, you would have said,
“These guys have it. I don’t care who’s going to win,
Compaq, IBM. I don’t know who’s going to win,
Japanese computers. I know Microsoft,
MS-DOS is the right thing.
You could've buy microsoft.
Again, I'm repeating myself —
stocks are not a lottery ticket.
There’s a company behind every stock,
and you can watch it. You have plenty of time.
People are in an amazing rush
to purchase a security.
They’re out of breath when they call up.
You don’t need to do this.
You need an edge to make money, too.
People have incredible edges
and they throw them away.
I’ll give you a quick example of Smith Kline.
This is a stock that had Tagamet.
You didn’t have to buy Smith Kline when Tagamet
was doing clinical trials.
You didn’t have to buy Smith Kline when Tagamet
was talked about in the
New England Journal of Medicine
or in the British version, Lancet.
You could have bought
Smith Kline when Tagamet first came out
or a year after it came out.
Let’s say your spouse,
your mother, your father
or you are a nurse, a druggist,
or you're writing all these prescriptions.
Tagamet was doing an amazing job of curing ulcers.
It was a wonderful pill for the company
because if you had stopped taking it,
the ulcer came back.
It wasn’t a crummy product,
you took it for a buck and then it went away.
But it was a great product for the company.
But you could have bought it two years
after the product was on the market and made
5 or 6 times your money.
I mean — all the druggists, all the nurses,
all the people, millions of people saw this product,
and they’re all buying oil companies
or drilling rigs.
It happens.
And then three years later or four years later Glaxo,
even bigger company, a huge company, a British company,
bought Zantac
which was a better, at that time, an improved product.
You could have seen that take market share and do well.
You could have bought Glaxo and tripled your money.
So, you only need a few stocks in your lifetime.
They’re in your industry.
I think if people —
If you’d worked
in the auto industry –
let’s say you're an auto dealer
for the last 10 years –
you would have seen Chrysler come up with the minivan.
If you were a Buick dealer,
a Toyota dealer, a Honda dealer, you would have seen
the Chrysler dealership packed with people.
You could have made 10 times your money on Chrysler
a year after the minivan came out.
Ford introduced the Taurus Sable,
the most exceptional line of cars
in the last 20 years.
Ford went up sevenfold on the Taurus Sable.
So, if you’re a car dealer,
you only need to buy a few stocks every decade.
When your lifetime is over,
you don’t need a lot of five-baggers
to make a lot of money starting with $10,000 or $5,000.
So, In your own industry you’ll see a lot of stocks,
and that’s what bothers me.
There are good stocks out there looking for you.
People just aren’t listening
and they’re just not watching it.
They have an incredible edges.
People have big edges over me.
They work in the aluminum industry.
I see the aluminum industry has been coming down;
the inventory has coming down
for six straight months. I see demand improving.
In America today,
it’s hard to get an
EPA permit for a bowling alley,
never mind an aluminum smelter.
So, you know when aluminum gets tight,
and you just can’t build seven aluminum smelters.
So, when you see this coming,
you can say, “Wait a second.
I can make some money.”
When an industry goes from terrible to mediocre,
the stock goes north.
When it goes from mediocre to good,
the stock goes north.
When it goes from good to terrific,
the stock goes north.
There's lots of ways to make money
in your own industry.
You can be a supplier in the industry.
You can be a customer.
This thing happens in the paper industry.
It happens in the steel industry.
It doesn’t happen every week,
but if you’re in some field, you’ll see it turn.
You’ll see something in the publishing industry.
These things come along,
and it’s just mindboggling that people throw it away.
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