Buffett’s notoriously optimistic about America, our ability to overcome hardships, and our future. When the markets were roiling in the fall of 2008, and fear and panic were at their height, Buffett became something of a national cheerleader. He wrote an op-ed for the New York Times called “Buy American. I Am,” in October 2008. In the article, he wrote that amid the chaos, good American companies were selling for such inexpensive prices that he would be buying them for his own personal portfolio—not Berkshire’s portfolio, mind you, which already held many great American companies, but his own account, where before this he’d owned only government bonds.1
Why would Buffett so boldly declare this “Buy American” sentiment at such a perilous time? Because he believed, in his words, that “fears regarding the long-term prosperity of the nation’s many sound companies make no sense.”2 Buffett was decidedly not making a “market call,” nor predicting that the stock market was going to turn around anytime soon. He very clearly indicated that he had no idea when the market would turn around, only that, eventually, it would. And when it did you wanted to be among the brave investors who bought when times looked bleakest.
Buffett is without a doubt an optimist at heart, but he’s smartly recognized and exploited the fact that pessimistic times can create scenarios that lead to great wealth for investors in the long term. That will likely turn out to be the case for investors who listened to Buffett’s advice and bought stocks when it seemed the whole world was falling apart around them in the fall of 2008 (and I certainly hope to be in that number). As he said in his New York Times piece, echoing thoughts he’s shared before, “bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”3 He’s also said, “When investing, pessimism is your friend, euphoria the enemy.”4
In his 2009 letter to shareholders, Buffett hammered this point again, writing, “A climate of fear is their [investors’] best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business—through the purchase of a small piece of it in the stock market—and what that business earns in the succeeding decade or two.”5
Buffett’s careful not to let his inherent optimism cloud his judgment. He remains even-tempered about his investments, and about the market’s ups and downs. His mentor Ben Graham talked and wrote about a fictional character named “Mr. Market,” who was available to do business with you each day, offering to buy your shares from you or sell you new ones, at varying prices.6 If you said no to him one day, it was no problem—he’d just return tomorrow with yet another offer. Buffett likes this analogy and has shared it over the years, reminding investors that they remain in charge of Mr. Market—not the other way around. You can’t get too worked up about his wishy-washy movements one way or the other.
This attitude is also what lets Buffett avoid periods of hype and hysteria, like the 1990s technology boom. The unlimited optimism that investors saw in technology at that time escaped Buffett. As he wrote in a 1979 article in Forbes, “The future is never clear. You pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”7
THE POWER OF PESSIMISM
“When you looked at a company [to value it], you said, ‘Well, it earned a dollar this year and I am going to muddle it out at 10 percent growth going on for X period of time.’ Whenever I was doing something, there was something in the back of my mind that always said, but what if it doesn’t? I think that that is one of the core attributes of value investors.
“If you think about the stock market, the stock market is an exercise in optimism. It is almost an irrational optimism because you are saying whenever you buy something, that you are smarter than the rest of the market. You know more. You have better insight than 100 million people who are willing to buy or sell stocks. I think that is a pretty bold statement for a lot of people. It is a bold statement for everybody.
“So to come into what is an optimistic pursuit and be pessimistic about whatever you are looking at, I think it is a pretty interesting mindset, but I don’t know that I have seen too many people in the stock market get in trouble by being too pessimistic. Generally speaking, you see the other side of the coin. People say, ‘Well, this company is growing at 40 percent, it is going to keep growing at 40 percent, or if I want to be conservative about it, it is going to just grow at 36 percent.’ Well you know, what if it doesn’t? What happens then? What is your protection?
Graham’s investing philosophy was actually built on pessimism, something that Buffett moved slowly away from over the years. Dubbed “cigar butt” investing, the idea was to find the cheapest stock possible (say, a company selling for below what all of its assets would fetch in the open market), and buy shares in it, hoping to snag a few final puffs from it as you might a discarded cigar you came across on the street. (Yes, yuck.) This school of thought didn’t take into account the quality of management, or the company’s future prospects, or the strength of its brand or competitive advantage. It was strictly about “margin of safety,” as we talked about in the previous chapter.
Graham’s style was pessimistic in the sense that you weren’t looking for businesses to invest in for the rest of their lives, and your life, benefiting from their moats and appreciating their ability to flourish. No, instead you were merely walking around with your head down, looking for one puff here and one puff there, with no eye to the future, no hope for the business tomorrow and the following day.
Thanks in part to the influence of his business partner, Charlie Munger (we’ll delve into this more in a later chapter), Buffett began looking past this pessimism, and looking for businesses that were strong enterprises with bright futures. Nonetheless, he did not allow himself to become blinded by optimism. He remains steadfastly realistic when analyzing companies, hoping for neither pies in the sky, nor cigar butts in the gutter with one remaining puff in them.
To make sure you don’t get caught up in unwarranted optimism, remember:
• Be levelheaded about your investments and the market at large. Learn not to be excited by market swings to the upside or devastated by market drops.
• You’re in charge of Mr. Market. Don’t let him boss you around.
• Quoting Buffett, “When investing, pessimism is your friend, euphoria the enemy.”