Mr. Buffett on the Stock Market
本文取材自財富雜誌於1999年中刊登巴菲特的文章，其中巴菲特警告投資人注意科技泡沫，並預言在可預見的未來股市的投資報酬率頂多能維持個位數。
不論是在公開的演講、每年寫給股東的信或是股東會，巴菲特幾乎很少公開談論股市的走勢，不過在最近幾個場合，巴菲特卻罕見地提及這方面的問題，相當有創意地分析股市的未來，財富雜誌的記者陸米思小姐碰巧在其中一個私人朋友的聚會，同時她也看了另一個巴菲特公開演講的錄影帶，之後她將這些巴菲特的即席演講內容過濾整理後，交給他本人過目略微增刪後對外發表。
以下是其主要內容:
股市投資人最近的期望可能有點過高，讓我來解釋理由，當然這不免讓我碰觸到股市這敏感的話題，不過要說明一點我並不是要預測它下一步怎麼走，在波克夏我們通常只專注在分析個別公司的價值，很少去管整個股市的高低，至於要預測股市下禮拜、下個月或是明年會怎樣，那更是不敢想。實際上股市通常會有好長一段時間偏離其實際的價值，雖然總有一天一切還是會回歸基本面。所以接下來我要講的，如果正確的話，將會與所有美國投資人未來的投資績效大大有關。
首先讓我們定義何謂投資，其實它的定義很簡單但卻常為人們所遺忘，那就是現在先投入一筆錢，未來一段時間後在拿回更多的一筆錢，當然還要先扣除期間的通貨膨脹。
現在就讓我們回到34年前，你會發現前17年與後17年有著神奇般的巧合與對比，看看當時股市的狀況
道瓊工業指數
1964年12.31 874.12點
1981年12.31 875.00點
即使是像我這種很有耐心、注重長期投資的人也看得出，頭十七年間指數沒什麼變動!!然而同一期間實際的經濟社會卻起了很大的變化，美國的GDP成長了370%，財富雜誌前五百大的銷售額(當然組成公司會有變動)成長近六倍，但奇怪的是道瓊工業指數竟待在原地踏步。
為了要搞清楚這到底是怎麼一回事，我們必須先看看影響投資結果的兩項重要變數-利率與獲利:
利率之於投資就好比地心引力之於物體，比率越高，向下牽引的力量也越大，任何的投資都必須先與無風險的政府公債作比較，投資政府公債的報酬，即殖利率的高低，會連帶影響到其他投資的價值，債券投資就是一個很明顯的例子，其價格會隨著殖利率的波動而作反向變化，至於其他的投資工具，如股票與房地產等，則由於還有其他變數，影響不會那麼地明顯，但它仍像是地心引力般無所不在。
在1964到1981年間，政府長期公債的利率呈現大幅走揚的態勢，從原先的4%飆到最後的15%，這彷彿是要人們在三倍的地心引力下生活，對所有投資的評價來說，簡直是無法承擔之重，當然最引人矚目的首推股票的價格，這間接解釋了為何這段期間，指數一動也不動。
另外一個原因是美國企業的獲利，下表是企業獲利佔GDP的比重，各位可以看出，這個比率在1932年達到巔峰之後大幅滑落，到了1950年代開始在4%到6.5%的區間盤整，緊接著在1982年滑落到3.5%的低點，所以事後看來當時的股市投資人同時面臨兩項負面因素的煎熬，獲利大幅衰減而利率一飛沖天，而投資人一般的心理總會將目前所面臨的投射到對未來的看法，這好比是開車不看前方卻猛盯著後照鏡，人們以為企業獲利將持續低迷、利率也會一直維持高檔，這再次解釋了為何即使GDP已成長了近四倍而股市卻還在原地踏步。
不過接下來的十七年，情況卻發生大逆轉，大家或許記得FED前任主席伏克爾就任時是多麼地不受歡迎，但看看他之後在提升經濟與抑制通膨的各項英雄事蹟，如何使得利率走勢產生大逆轉，假設你在1981年投資30年期票面利率的美國政府公債一百萬，到了1998年底在殖利率降為5%的情況下，你的投資將增值為8,181,219，約為13%的報酬率，當然利率的下降對於股價的推昇也有相同的效果，若同一期間你以相同的錢投資道瓊工業指數，你將得到19,720,112，約為19%的報酬率，這在歷史上是前所未有的成績，甚至比在1932年股市大崩盤時的最低點投資還要好。
不過值得注意的是同期間GDP的成長卻不到三倍，而獲利佔GDP的比率由於利率走低的影響發酵，提高為6%，這兩個投資人最在乎的變數的轉變，解釋了為何第二個17年美國股市大漲超過十倍(道瓊指數從875一路攀升到9,181)，當然也將加上市場的心理因素，一旦牛市開始啟動，人們發現自己不管用什麼方法都能賺大錢，所有人突然發覺自己不買股票根本是大錯特錯時，大家早已變成著名俄國心理學家Pavlov實驗下的那條狗，只要聽到紐約證券交易所早上九點半的鐘響就知道有東西可以吃，事實證明他們的信心一天比一天強，直到最後甚至堅信這一切都是老天爺所賜，從天上掉下來的一樣，回顧來時路，他們對未來更是充滿了瑰麗的期待，今年七月由潘韋伯證券公司公佈的調查顯示，投資經驗不到五年的菜鳥投資人預期未來十年的年平均報酬率竟高達22.6%，而即使是有二十年以上投資經驗的老鳥，也認為應該有12.9%。
只是接下來我要提的事可能會潑大家一大盆冷水，我認為參考前述變數未來股市的投資報酬率可能連12.9%的邊都沾不上，個人認為合理的推估應該是，假設GDP年成長率是5%(3%實質成長;2%通膨)事實上這已是最樂觀的估計，而利率沒什麼變，則股票的價值將不會有什麼變動，當然你還可假設股利報酬率高一點，但事實上以目前的股價水準，股利所佔的比重已大不如前，而透過市場買回自家股票提高每股盈餘也沒什麼用，因為同時也會有許多公司透過初級與次級市場大量地釋出股票與選擇權。
所以回到之前的推論5%的GDP成長率，這將大大限制了股市投資人未來的報酬，你不能一直預期年投資報酬率一直維持在12%，當美國企業的獲利率頂多只能達到5%時，若是非要我挑一個最有可能的結果，假設利率維持不變，通膨維持在2%左右(當然有可能上下變動)，加上高昂的摩擦成本，我想最多勉強可達6%，我是指對股東整體的投資人而言，而如果說這個預估是錯誤的話，只有可能向下調整的份兒，
此外你還必須考慮到一點，未來的報酬與現下的股市水平有絕對的關係，讓我們來看看你現在投入美國股市到底能得到什麼，以下是財富五百大企業(事實上五百大等於就是美國企業的縮影)在1998年的兩項重要數字，
獲利:334,335,000,000
市值:9,907,233,000,000(1999.3.15)
當我們在看這兩項數字時，必須注意的是獲利包括通用汽車分割子公司所得之160億與State Farm的獲利(註:美國最大的車險公司)因屬半公家單位故無參考市值，此外美國企業也未將股票選擇權的成本自獲利中扣除，當然也包括一些不具經濟效益的沖銷，事實上是可以加回實質獲利的，但不管以上那些例外情形，大致上美國股市投資人等於每年花十兆美金賺取三千多億美金的獲利。
有一點要特別注意的是股市投資人總的來說不可能從股市多賺一毛錢，除非這真得是企業真正賺得的，當然聰明如你可能會說我可以買低賣高賺取差價，但假設財富五百大企業合併成一家公司，而所有投資人都擁有一小部份股權，則前述的作法只會將股價越炒越高，但卻沒有一點實質的經濟效益，真正要靠的還是企業的實質獲利，讓可以分的餅變得大一點。
此外還要考慮交易成本，我把它稱之為摩擦成本，在現實社會中可是高得驚人，除了營業員賺的佣金差價，政府抽的稅收與經理人的管理費，不要有意無意的把這些投資上的成本排除在計算投資報酬之外，根據個人的估計光這些玩大風吹的成本一年大概就要超過一千億美金，等於是花三分之一塊餅來決定如何去分那剩下的三分之二。
所以我認為實在很難找到一個情況可以讓接下來的17年的股市投資報酬像過去17年的表現那樣好，今天如果投資人真想要在未來的十年甚至於二十年要有類似的投資報酬率，則我認為至少要有以下三項變數來配合方有可能:
利率必須要再往下降，若政府公債利率能由現在的6%繼續降到3%，則光是如此就等於讓所有的股票價值增加一倍，當然若你真得預期利率會這樣，或甚至降到像日本的1%一樣，建議你趕快去投資債券或利率選擇權。
企業獲利佔GDP的比重必須再成長，曾經有人半開玩笑地根我說，紐約的律師多到比人還多，這跟企業獲利會超過GDP的意思一樣，當你發現個別因素的預期成長率會一直超過總體的成長率時，事實上你已犯了數學上的錯誤，若你樂觀的認為企業獲利佔GDP的比重會一直維持在6%的水準，那我會認為你未免有點過於天真了，一個主要原因在於產業的過度競爭，另外一個原因牽涉到公共政策議題，若企業投資人想要分食更多的美國經濟大餅，等於是其他的團體只能分到更小的一塊餅，這肯定會引發政治問題，基於此點個人認為社會資源的大幅重分配是不太可能發生的。
具有資訊的優勢，關於這點可能有人會很樂觀的認為別的投資人或許很遜，但是他自己可就不一樣了，這在早期資訊封閉的時代或許真有那麼一回事，只要找到明牌，跟著營業員跑，便能乘風破浪。
不過我還是建議你回過頭來看看過去世紀初曾經改變整過國家的產業-汽車業與航空業，先說汽車業，這裏有一頁(70頁當中的一頁)美國汽車與卡車製造業者的名單，總計約二千多家的業者，其中有一家姑且叫波克夏汽車，另一家叫奧瑪哈汽車，當時若你具有足夠的見識，你一定會說我們的未來在這裏，但時至今日，看看這些公司經過多年的競爭廝殺後，卻僅存三家公司，所以這是一個對美國影響深遠的一個產業，也是對所有投資人影響深遠的一個產業(雖然與當初預期的完全不同) 。
你可以很容易就體會到汽車產業的重要性，卻很難從他身上賺到錢，不過從另一個角度來看，有時在這種革命性的產業反而比較容易找出輸家，比如說以這個Case來說，馬匹就是很明顯的例子，坦白說我很惋惜為何我的老爸當初沒有看空馬匹，因為當時在內布拉斯加州我們很容易就可以靠買賣馬匹來圖利。
美國馬匹數量
1900年:21,000,000
1998年: 5,000,000
另外一個本世紀革命性的產業就是航空業，一個讓投資人想到其美麗遠景便口水直流的新興產業，為此我特地跑去找當初所有的飛機製造商的資料，發現在1919到1939年間，大約有三百家公司之多，但到現在可能只剩幾家還能茍延殘喘，這裏有最近二十年宣告破產的129家航空公司名單，大陸航空甚至聰明到名列該名單兩次，截至1992年止，所有航空公司的合併淨利是零，沒錯連一毛錢也沒賺過，我在想假設當初萊特兄弟的小鷹號頭一次起飛時我也在其上，我一定會設法將他弄下來，我覺得卡爾馬克思對資本主義所造成的傷害可能還遠不及萊特兄弟，對於其他深深改變美國人生活但對投資人卻沒啥好處的輝煌產業，諸如收音機與電視等，我不再贅述，不過我倒是要下一個結論，那就是投資的要旨不在於評估這個產業對社會有多大的影響，或是他有多少的成長性，而在於個別公司有多少的競爭優勢，且更重要的這種優勢能維持多久!!一種具有重重保護的產品或服務才能真正為投資人帶來甜美的果實。
最後我不免想到17年後的人們會是個怎樣的狀況，或許經過17年的摧殘，屆時他們的心情又會跌到谷底，不過還好那應該只是因為當初他們期望太高而引發的失望所致，企業實質的獲利應該會比表面上看起來好很多，而其所創造的財富將會平靜的流入每一個美國家庭，使得他們能夠享有比今天更好的生活水平!!
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Mr. Buffett on the Stock Market
by Carol Loomis
Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it's going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it's correct--will have implications for the long-term results to be realized by American stockholders.
Let's start by defining "investing." The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.
Now, to get some historical perspective, let's look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here's what took place in that interval:
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
Now I'm known as a long-term investor and a patient guy, but that is not my idea of a big move.
And here's a major and very opposite fact: During that same 17 years, the GDP of the U.S.--that is, the business being done in this country--almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.
To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.
In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.
Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let's say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.
That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.
The power of interest rates had the effect of pushing up equities as well, though other things that we will get to pushed additionally. And so here's what equities did in that same 17 years: If you'd invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you'd have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.
The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you'd bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.
The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.
The chart, as you will see, starts in 1929. I'm quite fond of 1929, since that's when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who'd been burned. So he just stayed home in the afternoons. And there wasn't television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I've forever had a kind of warm feeling about the Crash.
As you can see, corporate profits as a percentage of GDP peaked in 1929, and then they tanked. The left-hand side of the chart, in fact, is filled with aberrations: not only the Depression but also a wartime profits boom--sedated by the excess-profits tax--and another boom after the war. But from 1951 on, the percentage settled down pretty much to a 4% to 6.5% range.
By 1981, though, the trend was headed toward the bottom of that band, and in 1982 profits tumbled to 3.5%. So at that point investors were looking at two strong negatives: Profits were sub-par and interest rates were sky-high.
And as is so typical, investors projected out into the future what they were seeing. That's their unshakable habit: looking into the rear-view mirror instead of through the windshield. What they were observing, looking backward, made them very discouraged about the country. They were projecting high interest rates, they were projecting low profits, and they were therefore valuing the Dow at a level that was the same as 17 years earlier, even though GDP had nearly quintupled.
Now, what happened in the 17 years beginning with 1982? One thing that didn't happen was comparable growth in GDP: In this second 17-year period, GDP less than tripled. But interest rates began their descent, and after the Volcker effect wore off, profits began to climb--not steadily, but nonetheless with real power. You can see the profit trend in the chart, which shows that by the late 1990s, after-tax profits as a percent of GDP were running close to 6%, which is on the upper part of the "normalcy" band. And at the end of 1998, long-term government interest rates had made their way down to that 5%.
These dramatic changes in the two fundamentals that matter most to investors explain much, though not all, of the more than tenfold rise in equity prices--the Dow went from 875 to 9,181--during this 17-year period. What was at work also, of course, was market psychology. Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these "investors" learn that when the bell rings--in this case, the one that opens the New York Stock Exchange at 9:30 a.m.--they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich.
Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors--those who have invested for less than five years--expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%.
Now, I'd like to argue that we can't come even remotely close to that 12.9%, and make my case by examining the key value-determining factors. Today, if an investor is to achieve juicy profits in the market over ten years or 17 or 20, one or more of three things must happen. I'll delay talking about the last of them for a bit, but here are the first two:
(1) Interest rates must fall further. If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks. Incidentally, if you think interest rates are going to do that--or fall to the 1% that Japan has experienced--you should head for where you can really make a bundle: bond options.
(2) Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems--and in my view a major reslicing of the pie just isn't going to happen.
So where do some reasonable assumptions lead us? Let's say that GDP grows at an average 5% a year--3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be. Nor can investors expect to score because companies are busy boosting their per-share earnings by buying in their stock. The offset here is that the companies are just about as busy issuing new stock, both through primary offerings and those ever present stock options.
So I come back to my postulation of 5% growth in GDP and remind you that it is a limiting factor in the returns you're going to get: You cannot expect to forever realize a 12% annual increase--much less 22%--in the valuation of American business if its profitability is growing only at 5%. The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.
Now, maybe you'd like to argue a different case. Fair enough. But give me your assumptions. If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, "Well, that's because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level." Or you've got to rearrange these key variables in some other manner. The Tinker Bell approach--clap if you believe--just won't cut it.
Beyond that, you need to remember that future returns are always affected by current valuations and give some thought to what you're getting for your money in the stock market right now. Here are two 1998 figures for the FORTUNE 500. The companies in this universe account for about 75% of the value of all publicly owned American businesses, so when you look at the 500, you're really talking about America Inc.
FORTUNE 500
1998 profits: $334,335,000,000
Market value on March 15, 1999: $9,907,233,000,000
As we focus on those two numbers, we need to be aware that the profits figure has its quirks. Profits in 1998 included one very unusual item--a $16 billion bookkeeping gain that Ford reported from its spinoff of Associates--and profits also included, as they always do in the 500, the earnings of a few mutual companies, such as State Farm, that do not have a market value. Additionally, one major corporate expense, stock-option compensation costs, is not deducted from profits. On the other hand, the profits figure has been reduced in some cases by write-offs that probably didn't reflect economic reality and could just as well be added back in. But leaving aside these qualifications, investors were saying on March 15 this year that they would pay a hefty $10 trillion for the $334 billion in profits.
Bear in mind--this is a critical fact often ignored--that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices. Let's say the FORTUNE 500 was just one business and that the people in this room each owned a piece of it. In that case, we could sit here and sell each other pieces at ever-ascending prices. You personally might outsmart the next fellow by buying low and selling high. But no money would leave the game when that happened: You'd simply take out what he put in. Meanwhile, the experience of the group wouldn't have been affected a whit, because its fate would still be tied to profits. The absolute most that the owners of a business, in aggregate, can get out of it in the end--between now and Judgment Day--is what that business earns over time.
And there's still another major qualification to be considered. If you and I were trading pieces of our business in this room, we could escape transactional costs because there would be no brokers around to take a bite out of every trade we made. But in the real world investors have a habit of wanting to change chairs, or of at least getting advice as to whether they should, and that costs money--big money. The expenses they bear--I call them frictional costs--are for a wide range of items. There's the market maker's spread, and commissions, and sales loads, and 12b-1 fees, and management fees, and custodial fees, and wrap fees, and even subscriptions to financial publications. And don't brush these expenses off as irrelevancies. If you were evaluating a piece of investment real estate, would you not deduct management costs in figuring your return? Yes, of course--and in exactly the same way, stock market investors who are figuring their returns must face up to the frictional costs they bear.
And what do they come to? My estimate is that investors in American stocks pay out well over $100 billion a year--say, $130 billion--to move around on those chairs or to buy advice as to whether they should! Perhaps $100 billion of that relates to the FORTUNE 500. In other words, investors are dissipating almost a third of everything that the FORTUNE 500 is earning for them--that $334 billion in 1998--by handing it over to various types of chair-changing and chair-advisory "helpers." And when that handoff is completed, the investors who own the 500 are reaping less than a $250 billion return on their $10 trillion investment. In my view, that's slim pickings.
Perhaps by now you're mentally quarreling with my estimate that $100 billion flows to those "helpers." How do they charge thee? Let me count the ways. Start with transaction costs, including commissions, the market maker's take, and the spread on underwritten offerings: With double counting stripped out, there will this year be at least 350 billion shares of stock traded in the U.S., and I would estimate that the transaction cost per share for each side--that is, for both the buyer and the seller--will average 6 cents. That adds up to $42 billion.
Move on to the additional costs: hefty charges for little guys who have wrap accounts; management fees for big guys; and, looming very large, a raft of expenses for the holders of domestic equity mutual funds. These funds now have assets of about $3.5 trillion, and you have to conclude that the annual cost of these to their investors--counting management fees, sales loads, 12b-1 fees, general operating costs--runs to at least 1%, or $35 billion.
And none of the damage I've so far described counts the commissions and spreads on options and futures, or the costs borne by holders of variable annuities, or the myriad other charges that the "helpers" manage to think up. In short, $100 billion of frictional costs for the owners of the FORTUNE 500--which is 1% of the 500's market value--looks to me not only highly defensible as an estimate, but quite possibly on the low side.
It also looks like a horrendous cost. I heard once about a cartoon in which a news commentator says, "There was no trading on the New York Stock Exchange today. Everyone was happy with what they owned." Well, if that were really the case, investors would every year keep around $130 billion in their pockets.
Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.
Let me come back to what I said earlier: that there are three things that might allow investors to realize significant profits in the market going forward. The first was that interest rates might fall, and the second was that corporate profits as a percent of GDP might rise dramatically. I get to the third point now: Perhaps you are an optimist who believes that though investors as a whole may slog along, you yourself will be a winner. That thought might be particularly seductive in these early days of the information revolution (which I wholeheartedly believe in). Just pick the obvious winners, your broker will tell you, and ride the wave.
Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.
All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people's lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, "Here is the road to riches." So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies--themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America--and also an enormous impact, though not the anticipated one, on investors.
Sometimes, incidentally, it's much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then--it's better sometimes to turn these things upside down--and that was to short horses. Frankly, I'm disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a "short squeeze."
U.S. Horse Population
1900: 21 million
1998: 5 million
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane--another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then--we must have been the Silicon Valley of that age--were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.
Move on to failures of airlines. Here's a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.
I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
This talk of 17-year periods makes me think--incongruously, I admit--of 17-year locusts. What could a current brood of these critters, scheduled to take flight in 2016, expect to encounter? I see them entering a world in which the public is less euphoric about stocks than it is now. Naturally, investors will be feeling disappointment--but only because they started out expecting too much.
Grumpy or not, they will have by then grown considerably wealthier, simply because the American business establishment that they own will have been chugging along, increasing its profits by 3% annually in real terms. Best of all, the rewards from this creation of wealth will have flowed through to Americans in general, who will be enjoying a far higher standard of living than they do today. That wouldn't be a bad world at all--even if it doesn't measure up to what investors got used to in the 17 years just passed.
不論是在公開的演講、每年寫給股東的信或是股東會，巴菲特幾乎很少公開談論股市的走勢，不過在最近幾個場合，巴菲特卻罕見地提及這方面的問題，相當有創意地分析股市的未來，財富雜誌的記者陸米思小姐碰巧在其中一個私人朋友的聚會，同時她也看了另一個巴菲特公開演講的錄影帶，之後她將這些巴菲特的即席演講內容過濾整理後，交給他本人過目略微增刪後對外發表。
以下是其主要內容:
股市投資人最近的期望可能有點過高，讓我來解釋理由，當然這不免讓我碰觸到股市這敏感的話題，不過要說明一點我並不是要預測它下一步怎麼走，在波克夏我們通常只專注在分析個別公司的價值，很少去管整個股市的高低，至於要預測股市下禮拜、下個月或是明年會怎樣，那更是不敢想。實際上股市通常會有好長一段時間偏離其實際的價值，雖然總有一天一切還是會回歸基本面。所以接下來我要講的，如果正確的話，將會與所有美國投資人未來的投資績效大大有關。
首先讓我們定義何謂投資，其實它的定義很簡單但卻常為人們所遺忘，那就是現在先投入一筆錢，未來一段時間後在拿回更多的一筆錢，當然還要先扣除期間的通貨膨脹。
現在就讓我們回到34年前，你會發現前17年與後17年有著神奇般的巧合與對比，看看當時股市的狀況
道瓊工業指數
1964年12.31 874.12點
1981年12.31 875.00點
即使是像我這種很有耐心、注重長期投資的人也看得出，頭十七年間指數沒什麼變動!!然而同一期間實際的經濟社會卻起了很大的變化，美國的GDP成長了370%，財富雜誌前五百大的銷售額(當然組成公司會有變動)成長近六倍，但奇怪的是道瓊工業指數竟待在原地踏步。
為了要搞清楚這到底是怎麼一回事，我們必須先看看影響投資結果的兩項重要變數-利率與獲利:
利率之於投資就好比地心引力之於物體，比率越高，向下牽引的力量也越大，任何的投資都必須先與無風險的政府公債作比較，投資政府公債的報酬，即殖利率的高低，會連帶影響到其他投資的價值，債券投資就是一個很明顯的例子，其價格會隨著殖利率的波動而作反向變化，至於其他的投資工具，如股票與房地產等，則由於還有其他變數，影響不會那麼地明顯，但它仍像是地心引力般無所不在。
在1964到1981年間，政府長期公債的利率呈現大幅走揚的態勢，從原先的4%飆到最後的15%，這彷彿是要人們在三倍的地心引力下生活，對所有投資的評價來說，簡直是無法承擔之重，當然最引人矚目的首推股票的價格，這間接解釋了為何這段期間，指數一動也不動。
另外一個原因是美國企業的獲利，下表是企業獲利佔GDP的比重，各位可以看出，這個比率在1932年達到巔峰之後大幅滑落，到了1950年代開始在4%到6.5%的區間盤整，緊接著在1982年滑落到3.5%的低點，所以事後看來當時的股市投資人同時面臨兩項負面因素的煎熬，獲利大幅衰減而利率一飛沖天，而投資人一般的心理總會將目前所面臨的投射到對未來的看法，這好比是開車不看前方卻猛盯著後照鏡，人們以為企業獲利將持續低迷、利率也會一直維持高檔，這再次解釋了為何即使GDP已成長了近四倍而股市卻還在原地踏步。
不過接下來的十七年，情況卻發生大逆轉，大家或許記得FED前任主席伏克爾就任時是多麼地不受歡迎，但看看他之後在提升經濟與抑制通膨的各項英雄事蹟，如何使得利率走勢產生大逆轉，假設你在1981年投資30年期票面利率的美國政府公債一百萬，到了1998年底在殖利率降為5%的情況下，你的投資將增值為8,181,219，約為13%的報酬率，當然利率的下降對於股價的推昇也有相同的效果，若同一期間你以相同的錢投資道瓊工業指數，你將得到19,720,112，約為19%的報酬率，這在歷史上是前所未有的成績，甚至比在1932年股市大崩盤時的最低點投資還要好。
不過值得注意的是同期間GDP的成長卻不到三倍，而獲利佔GDP的比率由於利率走低的影響發酵，提高為6%，這兩個投資人最在乎的變數的轉變，解釋了為何第二個17年美國股市大漲超過十倍(道瓊指數從875一路攀升到9,181)，當然也將加上市場的心理因素，一旦牛市開始啟動，人們發現自己不管用什麼方法都能賺大錢，所有人突然發覺自己不買股票根本是大錯特錯時，大家早已變成著名俄國心理學家Pavlov實驗下的那條狗，只要聽到紐約證券交易所早上九點半的鐘響就知道有東西可以吃，事實證明他們的信心一天比一天強，直到最後甚至堅信這一切都是老天爺所賜，從天上掉下來的一樣，回顧來時路，他們對未來更是充滿了瑰麗的期待，今年七月由潘韋伯證券公司公佈的調查顯示，投資經驗不到五年的菜鳥投資人預期未來十年的年平均報酬率竟高達22.6%，而即使是有二十年以上投資經驗的老鳥，也認為應該有12.9%。
只是接下來我要提的事可能會潑大家一大盆冷水，我認為參考前述變數未來股市的投資報酬率可能連12.9%的邊都沾不上，個人認為合理的推估應該是，假設GDP年成長率是5%(3%實質成長;2%通膨)事實上這已是最樂觀的估計，而利率沒什麼變，則股票的價值將不會有什麼變動，當然你還可假設股利報酬率高一點，但事實上以目前的股價水準，股利所佔的比重已大不如前，而透過市場買回自家股票提高每股盈餘也沒什麼用，因為同時也會有許多公司透過初級與次級市場大量地釋出股票與選擇權。
所以回到之前的推論5%的GDP成長率，這將大大限制了股市投資人未來的報酬，你不能一直預期年投資報酬率一直維持在12%，當美國企業的獲利率頂多只能達到5%時，若是非要我挑一個最有可能的結果，假設利率維持不變，通膨維持在2%左右(當然有可能上下變動)，加上高昂的摩擦成本，我想最多勉強可達6%，我是指對股東整體的投資人而言，而如果說這個預估是錯誤的話，只有可能向下調整的份兒，
此外你還必須考慮到一點，未來的報酬與現下的股市水平有絕對的關係，讓我們來看看你現在投入美國股市到底能得到什麼，以下是財富五百大企業(事實上五百大等於就是美國企業的縮影)在1998年的兩項重要數字，
獲利:334,335,000,000
市值:9,907,233,000,000(1999.3.15)
當我們在看這兩項數字時，必須注意的是獲利包括通用汽車分割子公司所得之160億與State Farm的獲利(註:美國最大的車險公司)因屬半公家單位故無參考市值，此外美國企業也未將股票選擇權的成本自獲利中扣除，當然也包括一些不具經濟效益的沖銷，事實上是可以加回實質獲利的，但不管以上那些例外情形，大致上美國股市投資人等於每年花十兆美金賺取三千多億美金的獲利。
有一點要特別注意的是股市投資人總的來說不可能從股市多賺一毛錢，除非這真得是企業真正賺得的，當然聰明如你可能會說我可以買低賣高賺取差價，但假設財富五百大企業合併成一家公司，而所有投資人都擁有一小部份股權，則前述的作法只會將股價越炒越高，但卻沒有一點實質的經濟效益，真正要靠的還是企業的實質獲利，讓可以分的餅變得大一點。
此外還要考慮交易成本，我把它稱之為摩擦成本，在現實社會中可是高得驚人，除了營業員賺的佣金差價，政府抽的稅收與經理人的管理費，不要有意無意的把這些投資上的成本排除在計算投資報酬之外，根據個人的估計光這些玩大風吹的成本一年大概就要超過一千億美金，等於是花三分之一塊餅來決定如何去分那剩下的三分之二。
所以我認為實在很難找到一個情況可以讓接下來的17年的股市投資報酬像過去17年的表現那樣好，今天如果投資人真想要在未來的十年甚至於二十年要有類似的投資報酬率，則我認為至少要有以下三項變數來配合方有可能:
利率必須要再往下降，若政府公債利率能由現在的6%繼續降到3%，則光是如此就等於讓所有的股票價值增加一倍，當然若你真得預期利率會這樣，或甚至降到像日本的1%一樣，建議你趕快去投資債券或利率選擇權。
企業獲利佔GDP的比重必須再成長，曾經有人半開玩笑地根我說，紐約的律師多到比人還多，這跟企業獲利會超過GDP的意思一樣，當你發現個別因素的預期成長率會一直超過總體的成長率時，事實上你已犯了數學上的錯誤，若你樂觀的認為企業獲利佔GDP的比重會一直維持在6%的水準，那我會認為你未免有點過於天真了，一個主要原因在於產業的過度競爭，另外一個原因牽涉到公共政策議題，若企業投資人想要分食更多的美國經濟大餅，等於是其他的團體只能分到更小的一塊餅，這肯定會引發政治問題，基於此點個人認為社會資源的大幅重分配是不太可能發生的。
具有資訊的優勢，關於這點可能有人會很樂觀的認為別的投資人或許很遜，但是他自己可就不一樣了，這在早期資訊封閉的時代或許真有那麼一回事，只要找到明牌，跟著營業員跑，便能乘風破浪。
不過我還是建議你回過頭來看看過去世紀初曾經改變整過國家的產業-汽車業與航空業，先說汽車業，這裏有一頁(70頁當中的一頁)美國汽車與卡車製造業者的名單，總計約二千多家的業者，其中有一家姑且叫波克夏汽車，另一家叫奧瑪哈汽車，當時若你具有足夠的見識，你一定會說我們的未來在這裏，但時至今日，看看這些公司經過多年的競爭廝殺後，卻僅存三家公司，所以這是一個對美國影響深遠的一個產業，也是對所有投資人影響深遠的一個產業(雖然與當初預期的完全不同) 。
你可以很容易就體會到汽車產業的重要性，卻很難從他身上賺到錢，不過從另一個角度來看，有時在這種革命性的產業反而比較容易找出輸家，比如說以這個Case來說，馬匹就是很明顯的例子，坦白說我很惋惜為何我的老爸當初沒有看空馬匹，因為當時在內布拉斯加州我們很容易就可以靠買賣馬匹來圖利。
美國馬匹數量
1900年:21,000,000
1998年: 5,000,000
另外一個本世紀革命性的產業就是航空業，一個讓投資人想到其美麗遠景便口水直流的新興產業，為此我特地跑去找當初所有的飛機製造商的資料，發現在1919到1939年間，大約有三百家公司之多，但到現在可能只剩幾家還能茍延殘喘，這裏有最近二十年宣告破產的129家航空公司名單，大陸航空甚至聰明到名列該名單兩次，截至1992年止，所有航空公司的合併淨利是零，沒錯連一毛錢也沒賺過，我在想假設當初萊特兄弟的小鷹號頭一次起飛時我也在其上，我一定會設法將他弄下來，我覺得卡爾馬克思對資本主義所造成的傷害可能還遠不及萊特兄弟，對於其他深深改變美國人生活但對投資人卻沒啥好處的輝煌產業，諸如收音機與電視等，我不再贅述，不過我倒是要下一個結論，那就是投資的要旨不在於評估這個產業對社會有多大的影響，或是他有多少的成長性，而在於個別公司有多少的競爭優勢，且更重要的這種優勢能維持多久!!一種具有重重保護的產品或服務才能真正為投資人帶來甜美的果實。
最後我不免想到17年後的人們會是個怎樣的狀況，或許經過17年的摧殘，屆時他們的心情又會跌到谷底，不過還好那應該只是因為當初他們期望太高而引發的失望所致，企業實質的獲利應該會比表面上看起來好很多，而其所創造的財富將會平靜的流入每一個美國家庭，使得他們能夠享有比今天更好的生活水平!!
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Mr. Buffett on the Stock Market
by Carol Loomis
Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss. But I want to make one thing clear going in: Though I will be talking about the level of the market, I will not be predicting its next moves. At Berkshire we focus almost exclusively on the valuations of individual companies, looking only to a very limited extent at the valuation of the overall market. Even then, valuing the market has nothing to do with where it's going to go next week or next month or next year, a line of thought we never get into. The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts. So what I am going to be saying--assuming it's correct--will have implications for the long-term results to be realized by American stockholders.
Let's start by defining "investing." The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future--more money in real terms, after taking inflation into account.
Now, to get some historical perspective, let's look back at the 34 years before this one--and here we are going to see an almost Biblical kind of symmetry, in the sense of lean years and fat years--to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here's what took place in that interval:
Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00
Now I'm known as a long-term investor and a patient guy, but that is not my idea of a big move.
And here's a major and very opposite fact: During that same 17 years, the GDP of the U.S.--that is, the business being done in this country--almost quintupled, rising by 370%. Or, if we look at another measure, the sales of the FORTUNE 500 (a changing mix of companies, of course) more than sextupled. And yet the Dow went exactly nowhere.
To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there.
In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities. So there--in that tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.
Then, in the early 1980s, the situation reversed itself. You will remember Paul Volcker coming in as chairman of the Fed and remember also how unpopular he was. But the heroic things he did--his taking a two-by-four to the economy and breaking the back of inflation--caused the interest rate trend to reverse, with some rather spectacular results. Let's say you put $1 million into the 14% 30-year U.S. bond issued Nov. 16, 1981, and reinvested the coupons. That is, every time you got an interest payment, you used it to buy more of that same bond. At the end of 1998, with long-term governments by then selling at 5%, you would have had $8,181,219 and would have earned an annual return of more than 13%.
That 13% annual return is better than stocks have done in a great many 17-year periods in history--in most 17-year periods, in fact. It was a helluva result, and from none other than a stodgy bond.
The power of interest rates had the effect of pushing up equities as well, though other things that we will get to pushed additionally. And so here's what equities did in that same 17 years: If you'd invested $1 million in the Dow on Nov. 16, 1981, and reinvested all dividends, you'd have had $19,720,112 on Dec. 31, 1998. And your annual return would have been 19%.
The increase in equity values since 1981 beats anything you can find in history. This increase even surpasses what you would have realized if you'd bought stocks in 1932, at their Depression bottom--on its lowest day, July 8, 1932, the Dow closed at 41.22--and held them for 17 years.
The second thing bearing on stock prices during this 17 years was after-tax corporate profits, which the chart, After-Tax Corporate Profits as a Percentage of GDP, displays as a percentage of GDP. In effect, what this chart tells you is what portion of the GDP ended up every year with the shareholders of American business.
The chart, as you will see, starts in 1929. I'm quite fond of 1929, since that's when it all began for me. My dad was a stock salesman at the time, and after the Crash came, in the fall, he was afraid to call anyone--all those people who'd been burned. So he just stayed home in the afternoons. And there wasn't television then. Soooo ... I was conceived on or about Nov. 30, 1929 (and born nine months later, on Aug. 30, 1930), and I've forever had a kind of warm feeling about the Crash.
As you can see, corporate profits as a percentage of GDP peaked in 1929, and then they tanked. The left-hand side of the chart, in fact, is filled with aberrations: not only the Depression but also a wartime profits boom--sedated by the excess-profits tax--and another boom after the war. But from 1951 on, the percentage settled down pretty much to a 4% to 6.5% range.
By 1981, though, the trend was headed toward the bottom of that band, and in 1982 profits tumbled to 3.5%. So at that point investors were looking at two strong negatives: Profits were sub-par and interest rates were sky-high.
And as is so typical, investors projected out into the future what they were seeing. That's their unshakable habit: looking into the rear-view mirror instead of through the windshield. What they were observing, looking backward, made them very discouraged about the country. They were projecting high interest rates, they were projecting low profits, and they were therefore valuing the Dow at a level that was the same as 17 years earlier, even though GDP had nearly quintupled.
Now, what happened in the 17 years beginning with 1982? One thing that didn't happen was comparable growth in GDP: In this second 17-year period, GDP less than tripled. But interest rates began their descent, and after the Volcker effect wore off, profits began to climb--not steadily, but nonetheless with real power. You can see the profit trend in the chart, which shows that by the late 1990s, after-tax profits as a percent of GDP were running close to 6%, which is on the upper part of the "normalcy" band. And at the end of 1998, long-term government interest rates had made their way down to that 5%.
These dramatic changes in the two fundamentals that matter most to investors explain much, though not all, of the more than tenfold rise in equity prices--the Dow went from 875 to 9,181--during this 17-year period. What was at work also, of course, was market psychology. Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these "investors" learn that when the bell rings--in this case, the one that opens the New York Stock Exchange at 9:30 a.m.--they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich.
Today, staring fixedly back at the road they just traveled, most investors have rosy expectations. A Paine Webber and Gallup Organization survey released in July shows that the least experienced investors--those who have invested for less than five years--expect annual returns over the next ten years of 22.6%. Even those who have invested for more than 20 years are expecting 12.9%.
Now, I'd like to argue that we can't come even remotely close to that 12.9%, and make my case by examining the key value-determining factors. Today, if an investor is to achieve juicy profits in the market over ten years or 17 or 20, one or more of three things must happen. I'll delay talking about the last of them for a bit, but here are the first two:
(1) Interest rates must fall further. If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks. Incidentally, if you think interest rates are going to do that--or fall to the 1% that Japan has experienced--you should head for where you can really make a bundle: bond options.
(2) Corporate profitability in relation to GDP must rise. You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems--and in my view a major reslicing of the pie just isn't going to happen.
So where do some reasonable assumptions lead us? Let's say that GDP grows at an average 5% a year--3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be. Nor can investors expect to score because companies are busy boosting their per-share earnings by buying in their stock. The offset here is that the companies are just about as busy issuing new stock, both through primary offerings and those ever present stock options.
So I come back to my postulation of 5% growth in GDP and remind you that it is a limiting factor in the returns you're going to get: You cannot expect to forever realize a 12% annual increase--much less 22%--in the valuation of American business if its profitability is growing only at 5%. The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.
Now, maybe you'd like to argue a different case. Fair enough. But give me your assumptions. If you think the American public is going to make 12% a year in stocks, I think you have to say, for example, "Well, that's because I expect GDP to grow at 10% a year, dividends to add two percentage points to returns, and interest rates to stay at a constant level." Or you've got to rearrange these key variables in some other manner. The Tinker Bell approach--clap if you believe--just won't cut it.
Beyond that, you need to remember that future returns are always affected by current valuations and give some thought to what you're getting for your money in the stock market right now. Here are two 1998 figures for the FORTUNE 500. The companies in this universe account for about 75% of the value of all publicly owned American businesses, so when you look at the 500, you're really talking about America Inc.
FORTUNE 500
1998 profits: $334,335,000,000
Market value on March 15, 1999: $9,907,233,000,000
As we focus on those two numbers, we need to be aware that the profits figure has its quirks. Profits in 1998 included one very unusual item--a $16 billion bookkeeping gain that Ford reported from its spinoff of Associates--and profits also included, as they always do in the 500, the earnings of a few mutual companies, such as State Farm, that do not have a market value. Additionally, one major corporate expense, stock-option compensation costs, is not deducted from profits. On the other hand, the profits figure has been reduced in some cases by write-offs that probably didn't reflect economic reality and could just as well be added back in. But leaving aside these qualifications, investors were saying on March 15 this year that they would pay a hefty $10 trillion for the $334 billion in profits.
Bear in mind--this is a critical fact often ignored--that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices. Let's say the FORTUNE 500 was just one business and that the people in this room each owned a piece of it. In that case, we could sit here and sell each other pieces at ever-ascending prices. You personally might outsmart the next fellow by buying low and selling high. But no money would leave the game when that happened: You'd simply take out what he put in. Meanwhile, the experience of the group wouldn't have been affected a whit, because its fate would still be tied to profits. The absolute most that the owners of a business, in aggregate, can get out of it in the end--between now and Judgment Day--is what that business earns over time.
And there's still another major qualification to be considered. If you and I were trading pieces of our business in this room, we could escape transactional costs because there would be no brokers around to take a bite out of every trade we made. But in the real world investors have a habit of wanting to change chairs, or of at least getting advice as to whether they should, and that costs money--big money. The expenses they bear--I call them frictional costs--are for a wide range of items. There's the market maker's spread, and commissions, and sales loads, and 12b-1 fees, and management fees, and custodial fees, and wrap fees, and even subscriptions to financial publications. And don't brush these expenses off as irrelevancies. If you were evaluating a piece of investment real estate, would you not deduct management costs in figuring your return? Yes, of course--and in exactly the same way, stock market investors who are figuring their returns must face up to the frictional costs they bear.
And what do they come to? My estimate is that investors in American stocks pay out well over $100 billion a year--say, $130 billion--to move around on those chairs or to buy advice as to whether they should! Perhaps $100 billion of that relates to the FORTUNE 500. In other words, investors are dissipating almost a third of everything that the FORTUNE 500 is earning for them--that $334 billion in 1998--by handing it over to various types of chair-changing and chair-advisory "helpers." And when that handoff is completed, the investors who own the 500 are reaping less than a $250 billion return on their $10 trillion investment. In my view, that's slim pickings.
Perhaps by now you're mentally quarreling with my estimate that $100 billion flows to those "helpers." How do they charge thee? Let me count the ways. Start with transaction costs, including commissions, the market maker's take, and the spread on underwritten offerings: With double counting stripped out, there will this year be at least 350 billion shares of stock traded in the U.S., and I would estimate that the transaction cost per share for each side--that is, for both the buyer and the seller--will average 6 cents. That adds up to $42 billion.
Move on to the additional costs: hefty charges for little guys who have wrap accounts; management fees for big guys; and, looming very large, a raft of expenses for the holders of domestic equity mutual funds. These funds now have assets of about $3.5 trillion, and you have to conclude that the annual cost of these to their investors--counting management fees, sales loads, 12b-1 fees, general operating costs--runs to at least 1%, or $35 billion.
And none of the damage I've so far described counts the commissions and spreads on options and futures, or the costs borne by holders of variable annuities, or the myriad other charges that the "helpers" manage to think up. In short, $100 billion of frictional costs for the owners of the FORTUNE 500--which is 1% of the 500's market value--looks to me not only highly defensible as an estimate, but quite possibly on the low side.
It also looks like a horrendous cost. I heard once about a cartoon in which a news commentator says, "There was no trading on the New York Stock Exchange today. Everyone was happy with what they owned." Well, if that were really the case, investors would every year keep around $130 billion in their pockets.
Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.
Let me come back to what I said earlier: that there are three things that might allow investors to realize significant profits in the market going forward. The first was that interest rates might fall, and the second was that corporate profits as a percent of GDP might rise dramatically. I get to the third point now: Perhaps you are an optimist who believes that though investors as a whole may slog along, you yourself will be a winner. That thought might be particularly seductive in these early days of the information revolution (which I wholeheartedly believe in). Just pick the obvious winners, your broker will tell you, and ride the wave.
Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.
All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people's lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, "Here is the road to riches." So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies--themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America--and also an enormous impact, though not the anticipated one, on investors.
Sometimes, incidentally, it's much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then--it's better sometimes to turn these things upside down--and that was to short horses. Frankly, I'm disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a "short squeeze."
U.S. Horse Population
1900: 21 million
1998: 5 million
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane--another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then--we must have been the Silicon Valley of that age--were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.
Move on to failures of airlines. Here's a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.
I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
This talk of 17-year periods makes me think--incongruously, I admit--of 17-year locusts. What could a current brood of these critters, scheduled to take flight in 2016, expect to encounter? I see them entering a world in which the public is less euphoric about stocks than it is now. Naturally, investors will be feeling disappointment--but only because they started out expecting too much.
Grumpy or not, they will have by then grown considerably wealthier, simply because the American business establishment that they own will have been chugging along, increasing its profits by 3% annually in real terms. Best of all, the rewards from this creation of wealth will have flowed through to Americans in general, who will be enjoying a far higher standard of living than they do today. That wouldn't be a bad world at all--even if it doesn't measure up to what investors got used to in the 17 years just passed.
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