There's a lot of times people —
buy
and the basis the stock is going down this much.
You know,
how much further it can go down?
I remember when Polaroid
went from $130 to $100 and people said,
“Here’s this great company, great record.
If it ever gets below $100,
just buy every share.”
It did get below $100
and a lot of people bought on that basis saying,
“Look, it’s gone from $135 to $100.
It’s now at $95. What a buy!”
Within a year, Polaroid was $18.
This is a company with no debt.
It was just so overpriced,
it went down.
I did the same thing in my
first or second year in Fidelity.
Kaiser Industries had gone from $26 a share to $16.
I said, “How much lower can it go at $16?”
I think we bought one of the
biggest blocks ever probably on the
American stock exchange of Kaiser Industries at $14.
I said,
“It’s gone from $26 to $16. How much lower can it go?”
At $10, I called my mother and said,
“Mom, you got to
look at this Kaiser Industries.
How much lower can it go?
It’s gone from $26 to $10.”
It went to $6. It went to $5.
It went to $4, and it went to $3.
I am fortunate this happened rapidly,
or I would probably still be caddying
or working at the Stop and Shop.
It happened fast.
It was compressed.
At $3,
I figured out there’s something wrong here
because Kaiser Industries owns 40% of Kaiser Steel.
They own 40% of Kaiser Aluminum.
They own 32% of Kaiser Cement.
They own Kaiser Broadcasting, Kaiser Sand and Gravel,
and Kaiser Engineers. They own Jeep.
They own business after business,
and they had no debt.
I learned this early.
This might be a breakthrough for some of you people.
It’s very hard to go bankrupt if you don’t have any debt,
It's tricky —
some poeple can approach that.
It's a real achievement.
But they had no debt
and the whole company, at $3,
was selling at about $75 million.
At that point, it was equal to buying
one Boeing 747. I said there’s something wrong
with this company selling for $75 million.
I was a little premature at $16,
but
I said everything’s fine,
and eventually this will work out.
And they — what they do
they gave away
all their shares to their shareholders.
They passed out shares at Kaiser Cement. They passed out shares in Kaiser Aluminum.
They passed out the public shares in Kaiser Steel.
They sold all the other businesses,
and you got about $50 a share.
And
But if you didn’t understand the company,
if you were just buying on the fact the stock
had gone from $26
to $16 and then it had gone to $10,
what would you do when it went to $9?
What would you do when it went to $8? What would you do when it went to $7?
This is the problem people have.
They sell stocks because
they didn’t know why they bought it,
then it goes down and they don’t know what to do now.
Do you flip a coin?
Do you walk around the block?
What do you do?
Psychiatrists haven’t worked so far.
I haven’t seen
the psychological or psychiatric fund
with the SEC and make it through as a mutual fund.
They haven’t seemed to help.
I’ve tried prayer. That hasn’t worked.
If you don’t understand the company,
you have this problem when they go down.
Eventually, they will always come back.
This one is uh —
This one doesn’t work, either.
People think
RCA just about got back to its 1929 high
when General Electric took it over.
Double knits never came back.
Remember those beauties?
Floppy disks, Western Union,
the list goes on and on.
People say it’ll come back.
Well, It doesn’t have to come back.
Here’s another one you hear all the time.
“It's $3. How much can I lose?”
I've had people call me up saying,
"I'm thinking of buying this stock at $3,
how much can i lose?
Well, again
you may need a piece of paper for this, but
if you put —
if you put $20,000 in stock at $50
or your neighbor put $20,000 at full —
at $50 into the stock.
And you put $20,000 in at $3.
and it goes to zero,
you lose exactly the same amount of money,
everything.
If people say, “It’s $3. How much can I lose?”
If you put $1 million on it, you can lose $1 million.
This may be a reason to research a stock.
The fact a stock is down $3 from $100
doesn’t mean you should buy it.
In fact, short sellers
– people who make really money in stocks –
They don’t short Walmart. They don’t short Home Depot.
They don’t short the great companies
like Johnson & Johnson.
They short stocks down from $80 to $7.
They’d like to short it at $16 or $22,
but they figured out at $7,
this company will go to zero.
They just haven’t blown taps on this thing yet.
It’s going to zero,
and they’re selling short at $7.
They’re selling short at $6, at $5, at $4, at $3,
at $2, at $1.25.
And you know what?
If you sell something short, you need a buyer.
Somebody must buy the damn thing!
You wonder who’s buying this thing?
The buyers are people saying,
“It’s $3. How much lower can it go?”
The important thing is —
you can’t get too attached to a stock.
You have to understand there’s a company behind it.
You can’t treat this like your grandchildren.
You have to deal with the stock and say,
“I understand the company.”
If it deteriorates, if the fundamentals slip,
you have to say goodbye to it.
One rule you wanna remember is,
"The stock does not know you own it."
This is a breakthrough.
You have to understand it and say,
they’re doing well
and as long as they keep doing well,
My best stocks have been my fifth, sixth,
and seventh years, I own them.
Not my fifth, sixth, or seventh day.
So, you have to understand that and stay with it.
Avoid long shots.
I bought about 30 long shots in my life.
I’ve never broken even on one.
The ones that are really bad are called,
“whisper stocks.”
If Arthur Levitt was here,
he’d appreciate these stories.
These are the times that somebody
calls you up and says,
“Hi, Peter. How’s Carolyn? How are the kids?
I’d like to talk to you about
international blivit.
And
what they have in this conversation —
(Inaudible)
Earnings will be unpredictable.
They’ll be small.
It’s $3 a share,”
and they keep whispering all these things.
What are you talking about?
I don’t understand it.
Either they’re so surrounded by people
that are going to run out and buy this stock
because it’s so exciting, or
they think the SEC is listening in.
They’ll get a shorter term –
they’ll get six months in the camp
rather than two years in the camp.
But whisper stocks don’t work.
I want to conclude
there’s always something to worry about.
If you own stocks. You can’t get away from it.
What happened in the 1950s,
people were worried about.
The only reason we got out of the Depression
was World War II. We got another recession
in the early 1950s.
We said we’re going to go right back into a depression.
People were worried about a depression in the 1950s,
and they were worried about nuclear war.
Back then,
the little warheads they had then,
they couldn’t blow up a McLane in West Virginia,
or a McLane in Virginia or Charleston.
Now, all of these countries that end in -stan –
there’s nine of these “-stan” countries
that came out of Russia.
They all have enough warheads to blow the world up
and no one worries about it.
When I was a kid,
people built fallout shelters.
We used to have civil defense drills.
Remember this one in high school?
You get under your desk. I never thought, even then,
that was a particularly good thing to do.
They’d blow a whistle, somebody would put on a hat,
and we would all get under our desks.
But in the 1950s,
people wouldn’t buy stocks.
Except for the 1980s,
the 1950s was the best decade this
century of the stock market.
People wouldn’t buy stocks in the 1950s
because they were worried about nuclear war
and they were worried about a possible depression.
Remember when oil went from $4 to $40
and was gonna go to $100
and we were going to have a depression?
About three years later, the same experts —
now higher paid — Oil is now at $10
they said it was going to $4
and we’re going to have a depression.
Remember how the Japanese were going to own the world,
Remember that one?
and we were going to have a depression?
And then about two years later,
we were all worried about Japan collapsing.
This is the most absurd thing I’ve ever heard.
This is a country with a 20% savings rate,
incredible work force,
incredible productivity,
and people were saying we’re going to have a depression
because Japan is going to collapse.
In their prayer list,
they’ve lowered Mother Teresa
and crippled children and
they’re praying for Japan at night.
It’s unbelievable.
The LDC debt
Remember the LDC debt? Remember that one?
All these countries
Chase had lent their net worth to Brazil,
Chile, Peru and those other countries.
And LDC said
They were not going to pay it back
and we were going to have a depression.
It always ends in we’re going to have a depression,
or we’ll have the Great Depression.
(Inaudible)
The Great Depression.
Or the big one
But all these countries
Now, I understand what these are called –
then, they were called “less developed” countries.
We used to call them “underdeveloped” countries.
Those are all wrong terms.
Those are not politically correct.
You must call these “emerging” countries.
You can't use “less developed” or “underdeveloped”
The other day I heard
the politically correct term
for somebody that’s overweight: laterally challenged.
So, There is always something to worry about.
And the key
organ in your body in the stock market
is your stomach.
It’s not the brain.
If you can add 8 and 8 and get reasonably close to 16,
that’s the only level of math you need to know.
You don’t need to know the area under the curve. Remember that quadratic equation
and integral calculus and the area under the curve?
Whoever cared what was under the damn curve?
But you had to study this.
You don’t need this in the stock market.
All you have to know is that
it’ll always be scary,
there will always be something to worry about.
You must forget all about it.
Cut it all out and own good companies
or own turnarounds.
Study them and you’ll do well.
And that's all there is.