Warren Buffett — chair and CEO of Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B) — is regarded as one of the best investors of all time. He is also regarded as one of the best teachers of sound investing principles.
Over his incredibly long and successful career, Buffett has made a name for himself for being able to distil complex investing ideas into pithy and relatable parables and quotes. You’ve probably heard some of his famous lines like “be fearful when others are greedy, and greedy when others are fearful”, or “it’s only when the tide goes out we can see who’s been swimming naked”.
But another Buffett quote has been doing the rounds lately, and I think it’s especially relevant to investors today.
It goes like this:
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future, will eventually bring on pumpkins and mice.
But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hand.
Buffett’s warning
You might be forgiven for thinking that Buffett only made this remark last week. But it’s actually from the 2000 Letter to Shareholders that Buffett writes every year. Yep, that quote is 20 years’ old.
And yet it seems intoxicatingly relevant today. Investors have indeed enjoyed ‘recent triumphs’ in the last few months. How else would you describe the performance of ‘hot’ stocks like Afterpay Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P) and Fortescue Metals Group Limited (ASX: FMG)? Back in 2000, shares were also reaching new highs. And we all know how that ended.
The situation is far more pronounced over in the United States today. Shares have been going ballistic, there’s no other word for it. The tech-heavy Nasdaq index is at record highs. The Dow Jone Industrial Average is up more than 52% since 23 March and only just off its own record high. Shares like Apple, Amazon.com, Zoom and Tesla have been exploding, the former reaching a market capitalisation of US$2 trillion just last week. It feels to me like ‘one helluva party’, as Mr Buffett put it.
Investors know there is not much in the way of fundamentals holding up the markets right now. We are going through one of the worst recessions in a hundred years, from which (in my opinion) the recovery will be long and rather slow. Yet the party rages. Is it close to midnight? I have no idea, I’m just another giddy dancer without a clock. But I’m wishing I brought a watch with me, that’s for sure.
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Sebastian Bowen owns shares of Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Tesla and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Apple and Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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