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Investors behave very humanly: they get wildly excited during a bull market and look in the rearview mirror , saying, "I made money last year." "I'm going to make even more money this year, so this time I'll borrow," or the neighbor says, "I wasn't at the market last year when that stupider neighbor made a ton of money, so this year I'll go too." So, they are always looking in the rearview mirror.
And when they look back and see that a lot of money has been made in recent years, they invest to the fullest and constantly push prices up. And when they look back and see that money wasn't being made, they just say, " This is a terrible place to invest." They don't care at all what happens to the business itself.
This is impressive , but it is precisely this that creates enormous opportunities . Just huge opportunities. I have lived, in terms of investing, about half of this period. I went through a long period of stagnation from '65 to '82, 17 years. In 1979, I wrote an article for Forbes. I simply asked, "How is this possible?" In 1970, pension funds were investing over 100 percent of their new money in stocks because they were excited about them.
Then stocks became much cheaper, and in 1978 , when they were worth pennies, funds invested a record low 9 percent of new money in them. People behave very strangely in their reactions because they are people: they get excited when others get excited, they are greedy when others are greedy, and they are afraid when others are afraid.
And they will continue to do so. You will see things you won't believe during your lifetime in the stock market. The country will develop over time, but you will observe these huge waves. And if you can remain objective, if you can temperamentally distance yourself from the crowd, you will become very rich.
And you do n't have to be very smart. I'm sure you're smart, but it doesn't take much intelligence. This requires character. You need to be able to sit and study something. When I started in 1950, I looked for things with a price tag half the profit; These were perfectly decent businesses, people wanted to work for these companies, and everyone knew they would continue to exist.
But they were not bought even at double the profit price, although interest rates at that time were 2.5%. You know, I started selling securities when I was 21 years old. And the Kansas City Life Insurance Company was a pretty well-known company in Omaha. The policies they sold, if you bought life insurance from them, had a fixed rate of 2% per annum.
Kansas City Life shares were selling for less than three times their earnings. You could have earned 35 % per annum if you had bought these shares. There was no doubt about the reliability of the company. I went to a local agent. I thought, "Damn it, I should be able to sell him some shares." I mean , this guy will get the point.
He invested his whole life in this company. I went to a local agent who had been working with them for 20 years. Uh , his name was Musa. I said, "Mr. Musa ." I said, "You know, you're selling these policies at 2%. Maybe even your family members have them, and you can buy a share in the company from which you receive a salary every month, on which you rely and whose future depends on the beneficiaries of these policies, and to which you sell a 2 percent investment.
And you could get 35% on your money." And he replied: "You know, stocks are nothing." And then I couldn't...I couldn't sell...you know, I was a terrible salesman. Well, of course, that's where you have to start, but this...this just blew me away. I was amazed by this. I thought...sometimes I asked myself if I was going crazy, you know, but then the same things happened.
I mean, in 1964, the Dow closed at 864. And in 1981, 17 years later, it closed at 865. It only went up one point in 17 years. Well, it's a very small movement. You can't even imagine how desperate people were during that period. But people lived better. So, things that don't make sense can last for quite a long time.
But they still come to an end. I mean this internet story. Well, there were companies that were sold for billions of dollars even though they actually had no prospects of making money. This is it , this is the " bubble". Herb Stein once said, " What can't last forever will eventually end." That sounds pretty…but think about it.
And especially remember this the next time you want to do something just because the stock has gone up a lot or your neighbor made money on it. You should just stop and think, would you buy this business outright? If an Internet company has issued 100 million shares and they are selling at 100, that's $10 billion .
Is it worth 10 billion dollars? If it's worth 10 billion, then next year it should bring you 700 or 800 million. And if it doesn't bring in 700 or 800 million next year, then the year after that it should bring in 10% more and continue to grow. There are many businesses capable of this, and people are just going crazy.
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