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Part - IV

Q: But there is a payback for those periods of excess performance. Do you worry now that we're going into a period where some other asset class, maybe kind of a more 1970 style environment is going to benefit from inflation, war. Things that seem to be cropping up now that we didn't worry about in that last period?

A: I don't know of any. If I knew I probably wouldn't say it anyway. But I don't know any asset class that I think is going to way outperform. I just don't think equities are going to perform anything like in the 17 year period. But they did in the immediately preceding one. But that again is sort of history. That's the way the stock market behaves. It overshoots in both directions because people get entranced with the rear view mirror. And they go to excesses in both directions.

Q: Has the downturn in the market created any interesting value opportunities this time round?

A: It helps. We are more likely to find something now than when the SNP was 1400. And we are more likely to find it when the LBO firms aren't as aggressive as they were or can't borrow as much money. So, in the end there is a market for businesses. And that market is in a significant way affected by the availability of credit for the purchase of businesses and it is affected by general level of security prices. So we see something more than we would see 3-4 years ago.

Q: Is there any specific industry that has now become more attractive?

A: It's businesses that I would have been interested in all along. But now they are at prices that make sense for us.

Q: People are reluctant to describe the potential for a bubble in real estate right now. Alan Greenspan has pooh-poohed the notion. And yet, we may not be there at the moment but given the disaffection with stocks as an investment class and given the performance of housing, both in terms of sales and price appreciation, might there be something brewing there that we don't yet understand?

A: Yes. I think it could be. I think that any time you get any large asset class that outperforms in a big way and people are aware of, and it gets into the public discourse, that you can't lose if - you whatever it is buy oil back in the 1980s, or you buy farmland here in late 70s. Almost always that ends badly. So I would say that when people start thinking it's inevitable that house prices will rise 6-8% a year when the CPI is rising less than that, it could lead to trouble. They start speculating on the change in the value of the asset rather than what the asset itself would produce. That's when you get into dangerous trouble.

I always say to myself when I buy a stock, would I be happy owning the stock if they close the stock exchange for five years tomorrow. And if I am happy owning the stock that means I am happy owning the business. I am buying it because of what I expect the business to do. But if I want the stock exchange to be open tomorrow, for me to buy that stock today, that means I am just betting on the price action of the stock. I don't want to do that. But that's what happens to people when they think that oil is going to $100 a barrel or farmland is going to $3000 an acre. And it reinforces itself as it goes along.

Q: Now people occasionally do that with your stock. They'll say that it should be at $100,000, or $90,000. It is somewhere around 35 times earnings right now?

A: Yes, but it doesn't sell totally on earnings as it does on investments.

Q: But you've never been shy of saying whether or not it is overvalued relative to the rest of the market. What do you think now?

A: I never give a number. But I don't want it to be overvalued. I don't want it to be undervalued either. But valuation is not precise. There is a range of intrinsic value. You might say that the high end of the range is probably 125-130% of the low end. If it's in that area, that's where I want to see it. I don't want to see either the buyer or the seller profit off each other in our stock. I look at it as a partnership. If the outgoing partner is leaving, I want them to get a fare price when they leave. And when someone is coming in as a partner, I want them to pay a fair price coming in. We try to follow practices and policies that lead to that sort of valuation most of the time. And generally speaking it's been pretty successful.

Q: I know what you do is very hard. And yet it all sounds very straightforward. Do people over-think this process of investing? Get too cute, get too fancy?

A: I say it's simple but not easy. And I also tell people that when they were 21, they got a card with 20 punches on it. And every time they made an investment decision, they used up a punch. And when the 20 punches were gone, they were done. They'd make a lot of money. Because they think a long time before they make any decision. They think a long time before they buy a car or a house. Many people do buy a stock just because somebody mentioned it that day. Particularly if stocks have been going up.

You have to stick with what you understand. You only buy into things that you understand. And then you are disciplined about what you will pay when you buy into them, you can't loose money. We've never lost a lot of money. We've missed all kinds of things on the upside. But the reason we do not lose is because we think of ourselves as buying businesses and not stocks. And we just pay an intelligent price for the business.

Q: Do you think the individual can still do that?

A: Some people can and some always have. But other people, they like to gamble. And in effect, everything that has happened in technology has made it easier to gamble in the stock market. The trick is just to do a few things.

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