Warren Buffett: How Long Can Stocks Stay Overvalued?

If you can stay objective throughout that, if you can detach yourself temperamentally from the crowd, you get very rich and you won't have to be very bright. I mean, I'm sure you are, but it just doesn’t take brains; it takes temperament.

Investors behave in very human ways, which is they get very excited during bull markets, and they look in the rearview mirror and they say, “I made money last year, I'm going to make more money this year.” So this time I'll borrow. You know, or the neighbor says, “You know, I wasn't in last year when that neighbor was dumber than I made a lot of money, so I'm going to go in this year.”

So they're always looking in the rearview mirror, and when they look in the rearview mirror and they see a lot of money having been made in the last few years, they plow in and they just push and push and push on prices. When they look in the rearview mirror and they see no money having been made, they just say, "This is a lousy place to be."

So they don’t care what's going on in the underlying business, and it's astounding. But that makes for a huge opportunity—just a huge opportunity. I mean, I've lived through roughly half, in an investing sense, about half that period, and I've had that long period of stagnation from '48, I mean, from '65 to '82—17 years.

I wrote an article for Forbes in 1979. I just said, “How can this be? Pension funds in 1970 put a hundred and some percent of their new money in stock because they were wild about stocks. Then they got a lot cheaper, and they put a record low in—nine percent of their net new money.”

In 1978, when stocks were way cheaper, people behave very peculiarly in terms of their reactions because they're human beings. They get excited when others get excited; they get greedy when others get greedy; they get fearful when others get fearful. They'll continue to do so, and you will see things you won't believe in your lifetime.

Securities markets and the country will do very well over time, but you will see these huge waves. If you can stay objective throughout that, if you can detach yourself temperamentally from the crowd, you get very rich, and you won't have to be very bright.

I mean, I'm sure you are, but it just doesn’t take brains; it takes temperament. It takes the ability to sit there and look at something. When I started out in 1950, I would go through and find things at two times earnings, and they were perfectly decent businesses. People wanted jobs at those companies, and everybody knew they were going to be around, and they wouldn't buy them at two times earnings when interest rates were two and a half percent.

I started selling securities when I was 21. A Kansas City Life Insurance Company happened to be a fairly prominent company in Omaha. The policies they sold you, if you were buying life insurance from them, had a built-in assumption of two percent interest. The stock of Kansas City Life was selling at less than three times earnings. You're getting 35 percent if you bought the stock. No question about the soundness of the company.

I went to the local agent. I thought, “Hell, I'll be able to sell him a few shares of stock.” I mean, the guy would understand him; he's got his whole life invested in this company. I went to the local agent; we’d been with him for 20 years, and his name was Moose. I said, “Mr. Moose, you know, you're selling these policies with two percent.

You may even have a few members of your own family, and you can buy into this company whose paycheck you depend on every month, and your beneficiaries of these life policies depend on, and who you're selling them, you know, two percent investment on, and you get 35 on your money.”

Suddenly, you know, stocks aren't any good. And I couldn't tell you, you know, I was a lousy salesman. I mean, you have to start with that. But it just blew me away.

It blew me away. Sometimes I used to wonder if I was nuts, you know? But those things—the same thing happened. In 1964, the Dow closed at 864. At the end of 1981, 17 years later, it closed at 865. It moved one point in 17 years. Now, that's not a big move, and you can't believe how discouraged people were by that during that period.

But, you know, people were living better. So things can go on a long time that don't make sense, but they do come to an end. I mean, the internet thing—I mean, you had these companies selling for many billions of dollars that had no, really, frankly, no prospects of making any money. That's a bubble.

But Herb Stein one time said, “Anything that can't go on forever will end.” Now that seems pretty... but think about that. And particularly think about it next time you're trying to do something just because the stock's gone up a whole lot, you know, and your neighbor's made money or something.

You've got to be, you just have to sit and think objectively. Think about, would I buy this whole business? It's an internet company, it's got 100 million shares out and selling for 100. That's 10 billion dollars. Is it worth 10 billion dollars? If it's worth 10 billion dollars, it's got to be able to give you, you know, 700 or 800 million next year.

If it doesn't give you 7 or 800 million next year, it has to give you maybe 10 more than that the year after, and continue. There aren't a lot of businesses that can do that, and people just go crazy.