- When Buffett ran his partnership he would calculate the intrinsic value of the general market. The intrinsic value calculation for the market as a whole related to blue-chip securities. He felt that all stocks would be affected by a substantial decline in market prices.
- Buffett seems to adjust his exposure to undervalued equities based on his calculation of the general market’s intrinsic value.
- Although Buffett pays attention to the level of the general market, his primary focus was on finding undervalued securities. He was not making a forecast of either the stock market or general business conditions.
- Buffett believes that a market decline is a time of opportunity because there are more undervalued securities available.
- Luck is an important factor in short-term performance of the stock market.
From the February 11, 1959 letter:
- Market psychology is a major factor in determining the level of the stock market. This affects amateurs and professionals and can continue to drive up market prices as long as these participants believe there is easy money to be made in stocks.
- Buffett believes that there may be relationship between the duration of a run-up in stocks and the eventual reaction to it.
- The general public, in Buffett’s view, believes that stock market profits are inevitable.
- Stock market prices and intrinsic values can move independently.
- Buffett looks at a stock market decline as potentially advantageous, if it allows him to add to his position in an undervalued security.
- Buffett expects to find fewer undervalued securities when the market level is high.
Buffett does not believe he can predict the future movements of the stock market or general business conditions. He expects that over time there will be down years (some relatively severe), up years and those in between. It is not possible to predict their magnitude or sequence. However, over the long term the level of return will reflect the performance of the underlying businesses. In 1962 he expected this to be 5% to 7% based on a combination of dividends and reinvested earnings.