Jeremy Grantham wonders what on earth Warren Buffett was thinking when he wrote that editorial in the New York Times telling everyone he was buying stocks. After all, stocks weren’t cheap–they were fairly valued. So what’s up with Warren being all hot to buy something that was just fairly valued?
At about 950 on the S&P on October 16, [Warren Buffett] announced that he was a personal buyer of U.S. stocks because they were cheap and their prices reﬂected widespread fear. This is not typical for him, but he certainly did it in 1974. When he said it back then, every stock in our portfolio at Batterymarch yielded almost 10%! The portfolio P/E was below 7.5x. Even with hindsight, if you value the market in 1974 using our current methodology, it was very much cheaper than it is today at 950, which is what we calculate as almost precisely fair value.
His recent announcement made the market seem so much more exciting than boring old fair value. So what are the possibilities?
Was he performing a civic duty? Certainly, animal spirits are a critical component of any recovery, so encouragement to take risk from an authoritative source makes perfect sense. Does he believe that 1974- type cheapness can never return, or is very unlikely in this particular case? If that were the argument, we would disagree; we suspect that cheaper prices are not just possible but probable, although admittedly far from certain. Has he perhaps a tactical market timing model that produces his obvious excitement, despite these ordinary values? Most unlikely, given his style. Or are our numbers wrong? Perish the thought! In any case, it is all an interesting conundrum.