In early 2021, age-old investing principles of business valuation were declared passe by meme-stock buyers, SPAC enthusiasts, and crypto-traders. A new generation of market players declared that Warren Buffett’s proven wisdom on business analysis was out of touch and out of date. This time it’s different, they said, when explaining why time-honored principles had died.
As 2022 gets underway, the trendsetters are being proven wrong and the venerable tenets of business and investing as durable as ever. Such a pattern is not new. Tech stock buyers in 2000 said Buffett and traditional investing were dead. But then the internet bubble burst in 2001. Real estate and derivative traders in 2007 thought they found a market without a ceiling. Then the Great Recession hit in 2008.
Today, an index of meme stocks is down deeply — darling of them all, GameStop GME, +4.69% peaked near $500 a share last year and now trades below $100. SPACs are a mixed bag, with many losing money for all but their sponsors, while bitcoin BTCUSD, -0.72% and other cryptocurrencies still struggle to prove their economic durability.
Meanwhile, shares of Buffett’s company, Berkshire Hathaway BRK.A, +1.88%, BRK.B, +1.70% have been chugging higher, outperforming the S&P 500 SPX, +2.43% so far in January and over the past 12 months. Such smooth sailing has been in the company’s DNA for decades, with occasional off years or months, often because of passing contrary fads.
At the height of the meme-stock frenzy last year, I shared some time-honored tips for novice investors swept up in the latest manias. But such advice is hard to heed when it seems like there’s easy money to be made in the markets. In today’s more sober circumstances, and given that asset prices remain high compared to business value, people may be more receptive to listening.
An old joke is particularly timely today: St. Peter had some bad news for an oil prospector who appeared at the pearly gates of heaven: “You’re qualified for admission,” St. Peter told the man, “but, as you can see, the section for oil prospectors is packed. There’s no way to fit you in.”
After a moment, the prospector asked to say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector yelled, “Oil discovered in hell!” Immediately, most of the oil prospectors stampeded out for the nether regions.
Impressed, St. Peter invited the prospector to move in and get comfortable. The prospector paused, saying “No, I think I’ll go along with the rest of them. There might be some truth to that rumor after all.”
Believing one’s own rumors describes last year’s herd behavior: most people know that meme stocks get that name because a meme stock is literally a meme, which means behavior passed from person to person by imitation not analysis. Most people also get that crypto is speculative and that SPACs stack the deck in favor of promoters and against ultimate shareholders.
Buffett is often called the “Sage of Omaha” for his wisdom, and his advice to avoid the herd and the dangers of self-delusion is probably his wisest, most-repeated — and most-ignored — advice. We all need to hear such lessons repeatedly because reality’s temptations are always at war with our ideals.
Two other core Berkshire values many neglected last year: patience and permanence. Last year’s fashion favored instant paydays, while the typical Berkshire shareholder bought shares decades ago, holds outsized unrealized gains, and never intends to sell.
Related: Berkshire investors knows it takes decades to build real wealth. Skill, discipline and luck are key, which get-rich-quick traders are now learning the hard way.
Ideally, investors focus on a company’s operating strategies, products and competitive positioning. Such an investor does not plunk down money because a company hands out free popcorn or a celebrity endorser pitches a security.
Times change but investment principles are timeless. Business valuation does not change, even when meme-stock traders or oil prospectors buy their own rumors. While it’s always tempting to say “this time it’s different,” with investing, it never really is.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” Cunningham owns shares of Berkshire Hathaway. For updates on Cunningham’s research about quality shareholders, sign up here.