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Warren Buffett has sprinkled US investors with tons and tons of useful advice over the years it's actually pretty insane how much useful advice comes out of that man's mouth but this particular 1962 interview stands out as how it is directly relevant to investing today if you're investing today you need to have seen this interview and you need to understand what this interview is so that's what I'm going to do and breakdown in today's video but first I'm going to set the scene for 1960 to give you sort of an overview of what the markets were like before this interview took place and while this interview took place so that you can further appreciate what is happening in this interview then I'm going to play this interview for you and I'm going to provide some explanations and some commentary on different parts of the interview so that you can understand what it means and then towards the end I'm going to explain how that interview and how what is said in that interview is directly relevant if you're investing in today's market in 2019 so if you do enjoy this video the best way that you can let me know is by hitting that subscribe button and hitting that notification bell so that you get notified next time my videos come out but for now let's start off by looking at how the market was looking like in 1962 what was the market like during this interview in terms of the stock market from December 1961 all the way to June 1962 the sp500 dropped from about six hundred and ten points down to four hundred and sixty five points and this represents about a twenty four percent decline in stock prices in just six months and this was so big that it has a name and it is called the Kennedy slide of 1962 in April of 1962 US Steel which was a company that had about 25 percent market share on steel in the United States made public their plans to increase their steel prices by 3.5 percent per ton the US government fired back and decided that they were going to be changing a lot of their submarine contracts which involved a lot of steel naturally to smaller companies that were not planning on hiking their steel prices and as a result US Steel the company decided to roll back their hikes they said they weren't going to do it now the details of these events is not what's important because that event is what triggered the decline but it was not the root cause as warren buffett explains in this interview that we're going to watch right now i think the president's action on steel probably had something to do with the timing of the decline but i don't think it was the the factor which determined the amount of the decline so there it is straight away buffett says in this interview that even though the events triggered the decline they would not the root cause or the cause of the magnitude of the decline for some time stocks have been rising at rather rapid rate corporate earnings have not been rising dividends have not been increasing and it's not to be unexpected that perhaps the correction of some of those unusual factors on the upside might occur on the downside so Buffett he is saying that while the events of the US Steel government conflict did trigger a decline the cause of the decline was much more widespread it was actually as a result of stock prices rising while stock earnings and dividends did not so the underlying value of those businesses on the stock market was the same because they were earning the same they were paying the same dividends but the price that investors were willing to pay was going up and he thinks that the decline in 1962 that was about 26% was a result of a correction of this case from time to time so that the stock market is a forecaster of events to come can you predict would you care to take a look at what do you think this might be forecasting the decline the stock market has been a good forecaster from time to time in the past it also has been a rather poor forecaster occasionally so the interviewer he asks Buffett whether he thinks that the stock market is an accurate forecaster and Buffett essentially says it does try and forecast the future but it's forecasting it's not always right forecasting means that the market is coming to a consensus coming to an agreement about what is going to happen in the future our corporate profits going to rise our dividends going to rise and of the consensus in 1961 or late 1961 was that they were going to rise and that did not materialize which meant that the stock prices needed to come down so sometimes it's a good for Costa and sometimes it's not for example the last four or five years the stock market has been booming along and presumably forecasting better business which is really not materialized corporate profits or are not only better than they were five years ago but stock prices are 50% higher there abouts so maybe the stock market is really correcting a previous incorrect forecast this time rather than making a new correct one this is a really interesting part of the interview and I think it's really important and it's easy to skip over this part if you're not listening listening closely he essentially says that sometimes it's a good predictor but sometimes the corrections are just redirecting for a previous Mis correction so and really what this means is that there doesn't have to be a recession in order for the stock market to correct or the stock market to come down significantly if their corporate profits might be going up businesses might be earning more dividends might be going up but if prices are going up too fast then maybe sometime in the future that's going to correct and they're going to come back down to levels that they should be but business doesn't actually have to be bad in order for there to be a correction business could be great but the stock prices could be going way too high but can you give us your opinion just exactly what happened what caused it well there was undoubtedly some force selling the the week when the stock market hit the news the previous week prices had declined about six percent for the week on average and there was some stock that was forced upon the market both my margin calls from brokers and some that was forced out buying in improperly secured bank loans and this in turn set up a self-generating mechanism on the downside for a while which we may have seen the last time in which we may not have seen the last of it and that is my favorite part of this interview which we may have seen the last of and which we may not have seen the last of buffett here again he doesn't try and predict what the stock market is going to do he does say a little bit about what caused it there was some more pressure on the downside he says a few technical things that a lot of you might not understand but he's not predicting that that is happening that's to be clear he's just observing what happened in the past because we can look back and see exactly happened but looking forward he says I don't know I don't know what's going to happen in the future and it really doesn't matter what is going to happen in the short-term you just need to look at the underlying businesses that you own and compare their earnings to the price that you're paying so now that we've looked at 1962 and what happened around there there was an event that triggered it but really the root cause was that prices were rising while earnings were not and then we had a look at the interview and heard Buffett explain that then how is that relevant to today to 2019 well let's take a look at the sp500 s price and compare it to its earnings over the past few years SP 500 over the past 12 years has risen from 1,800 to 29 50 which is up 64 percent meanwhile SP 500 earnings are up from 103 to 135 which is just 31% now as you can see SMP 500 earnings per share has grown by 60% so stock prices over the past twelve years are up 64 percent earnings per share is up sixty percent but total earnings and meaning the earnings for the whole company not on a per share basis is only up 30 percent so on a per share basis it looks like the stock price increases are justified but the important question to ask here is why has earnings per share risen by 60 percent when actual total company earnings has only risen by 30 percent and the answer is that companies are buying back stock and reducing the number of shares outstanding reducing the number of pieces that their corporate profit is being broken down into and while share buybacks do return value to shareholders they do not increase the overall value of the company the amount of earnings that the company can produce so what does that mean well it means that companies are taking on debt and using most of their earnings or a significant amount of their earnings to buy back stock which increases the value of each share but does not increase the value of the whole company they're not reinvesting to grow the earnings of the company they're just deleting shares so that each share becomes more valuable or is perceived to be more valuable and the problem with this is that the overall camp is not growing they're just reducing the number of pieces of pie that it's split into but that is going to hurt businesses over the long term because businesses need to reinvest to make business better not to just delete shares and to cut the pie into a smaller number of pieces and the like Buffett says who knows when the corrections are going to happen and who knows how significant they're going to be the only way to protect yourself in the stock market is to be an actual investor not a speculator and that means that you look at the businesses that you understand you calculate how much cash you can get out of them over the long term and then only pay a price that is substantially below that anything else is speculating and anything else is going to get you severely hurt at some point in the future we don't know when we don't know how big this the the damage is going to be but it will come and if you're speculating you should be very very worried as I said earlier in the video guys if you did enjoy this and you want to show me that you want to see more content like this video I put a ton of effort into this video then make sure you hit that subscribe button and hit that notification bell and if you're already a subscriber thank you very much and just leave a comment down below any kind of engagement like that helps out so much but thanks everyone for watching and I hope you guys have a great day and I'll see you in the next one
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