The Big Mistake: A Compelling Example

Take a look at this interesting example:

that you had encountered Warren Buffett at the end of 1975. Impressed
with his intellect and investment approach, you would have naturally
examined his track record — and almost certainly, to your everlasting
regret, not invested. Why? Because his results, as measured by the
stock price of Berkshire Hathaway, were truly dreadful over a four-year period. The stock not only declined and trailed the market during the 1973-74 downturn, but also in the 1975 rebound. Consider this data:

Yr    S&P 500  Berkshire
    18.9%      14.3%
1973   -14.8%     -11.3%
1974   -26.6%     -43.7%
1975    37.2%      -5.0%
TOTAL    2.0%     -45.8%


The rest is, of course, history. From $38/share at the end of 1975, Berkshire Hathaway has risen nearly 2,000 times to yesterday’s closing
price of $73,900. [For more information about the track records of
these investors (and many others), plus some of the wisest words ever
spoken about investing, see Buffett’s famous 1984 speech, The Superinvestors of Graham-and-Doddsville.]"

A complete account of this is available from Whitney Tilson on the Motley Fool Site.

The point is not that one should ignore performance.  That would be silly.  Performance is the ultimate test.  The problem is that the investor’s concept of the time frame necessary to gauge performance is far shorter than what occurs in reality.  I will elaborate on this in coming posts.  For now, it is important to understand that there can be muti-year eras of strange market behavior, like the Internet bubble.

Determining investment potential involves understanding the methods used, and whether these methods are sound on a long-term basis.  It takes both developing the method and the discipline to follow it even when there are painful setbacks.

Successful investing depends on profiting from the mistakes of other market participants.  It may not be possible to "time the market" by predicting when value will be recognized.

There will always be those that call a particular market turn, but the question is the method used.  Since many thousands of managers are always trying to do this, there will always be some who succeed.  How does one avoid being "Fooled by Randomness?"

This intriguing topic will be the subject of future posts.

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