WARREN BUFFETT AND THE STOCK MARKET
By Samuel Chong
Warren Buffett has given out dozens of interviews regarding the stock market. More importantly, he has detailed his investments in his annual letter to shareholders. There, careful readers will be able to find interesting investment philosophies of Warren Buffett, good friend of Bill Gates and a world famous investor.
Back then, in 1999, Warren Buffett broke down a period of 34 years of the stock market by two, with the first period from Dec. 31,1964 to Dec. 311981 in which the Dow Jones Industrial Average rose from 874.12 to 875.00, an increase of 0.1% over the 17 years. During the same period, the gain in Gross National Product was 373%. On the other hand, the second 17 year period, the Dow Jones Industrial Average rose from 875.00 of Dec. 31, 1981 to 9181.43 of Dec. 31, 1998, a gain of more than 10 fold. However, during this period, the gain in Gross National Product was only 177%.
So, what caused the stock market stagnation during the first 17 year period and the more than 10 fold rise in the second 17 year period? According to Warren Buffett, it was the interest rates.
From Dec. 31, 1964 to Dec. 31, 1981, the interest rates rose from 4.20% to 13.65%. With a higher interest rates, money supply was reduced, with less money available to be invested in the stock market. On the other hand, the interest rates decreased from 13.65% to 5.09% from Dec. 31, 1981 to Dec. 31, 1998. With the money supply increase, more money is available to be interested in the stock market, causing a rise in the prices of the shares.
When Warren Buffett gave the interview in 1999, he hinted that the stock market could not go up forever and that investors should not have exuberated expectations. Indeed, as the market suffered the Internet Bubble burst, Warren Buffett shifted his investments to government bonds and, very interestingly, silver. He purchased about 20% of world silver supply at the price of below $5/once. Currently, silver prices have gone up to over $25/once.
Since 1999, Warren Buffett has given out more interviews. Many of his interviews reflected his philosophies on his investment and how the government should be run. He not only diversified his investment portfolio by investing in Chinese companies such as PetroChina and BYD, a car battery company who recently just opened its North American headquarters in Los Angeles, (in which I was honored to be the Chinese simultaneous interpreter for the opening ceremony, meeting with Charles Munger, Warren Buffett's long time business partner), but also suggested that the government should tax the rich.
In other Warren Buffett's interviews, he promised to give out 90% of his wealth after he passes away, in which some of them are already donated to Bill Gates and Melinda Foundation, run by his good friend, Bill Gates.
We admire Warren Buffett's endeavors in creating a world class investment
company, Berkshire Hathaway. We, however, appreciate more at Warren
Buffett's educational efforts in helping others becoming successful investors
like him. Hope he is long lived as his parents did. (Genetically speaking,
Warren Buffett is to have longevity, like his parents).