BBC Monday, 30 April, 2001, 11:04 GMT 12:04 UK

Buffett: Investors live in 'dream world'

Warren Buffett, the pin-up for 300,000 investors One of the world's most successful investors, Warren Buffett, has warned that many companies and investors have overblown expectations of profit growth and investment returns.

Speaking to shareholders of his legendary Berkshire Hathaway investment fund in Omaha, Nebraska, the 70-year-old Mr Buffett said some US firms and investors expected profits to grow by 15% or more.

Investors - spoilt by a decade-long "bull market" of strongly rising share prices - were entering a "dream world" if they believed in such predictions, Mr Buffett said.

"The probability of us (Berkshire Hathaway) achieving 15% growth in earnings over an extended period of years is so close to zero it's not worth calculating," he argued, and added that only two or three of the top 500 US firms might get anywhere close to such figures.

'Irrational expectations'

In his annual letter to shareholders Mr Buffett quoted a Paine Webber-Gallup survey, which suggested that four months before the dot.com bubble burst, investors expected on average annual returns of 19%.

Mr Buffett's comment: "That, for sure, was an irrational expectation."

Charlie Munger, Mr Buffett's 77-year-old partner and the vice chairman in the Berkshire venture, chipped in: "It's simply crazy to have such very high expectations."

And Mr Buffett found few kind words when describing last year's stock market bubble: Some businesses had all the qualities of a "chain letter" he said, "for which many fee-hungry investment bankers acted as eager postmen".

"It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them," Mr Buffett said.

Annual return: 23.6%

Known as the 'Sage of Omaha' and famous for both his folksy style and shrewd investment decisions, Mr Buffett was panned by critics for missing out on the internet stock boom of 1999 and 2000.

Berkshire Hathaway shares lost about half their value.

Now that the technology bubble has burst, Mr Buffett's strategy of conservative bricks-and-mortars investments has turned out to deliver better long-term returns.

The fund's share price is up nearly 13% on a year ago - a period during which most leading stock market indexes posted sharp losses.

The gains achieved during the past, highly volatile twelve months on the markets, though, are small compared with the fund's overall performance.

Mr Buffett has managed to deliver his investors an average return of just under 24% a year since 1965, when he bought a small textile mill called Berkshire Hathaway as his investment vehicle.

Back then, one Berkshire Hathaway share cost $12. Today, investors may think about taking out a mortgage to buy a single share - they currently trade at $67,005.

This is a return of 207,821% over 36 years, and compares with a gain of just 5,383% for companies listed in the popular S&P 500 stock index.

In fact, he never had a losing year - although in 1999 he came close, with the share price gaining just half a percent.

The secret to Warren Buffett's success is old-fashioned value investing - not looking for the quick gain from speculative stock market movements, but putting the fund's money into undervalued but promising companies in slightly unfashionably industries.

Berkshire Hathaway's investors, who turned up in their thousands at the shareholder meeting in Omaha, Nebraska, were certainly grateful that Mr Buffett had stuck to his own, at times unfashionable, investment strategy.

-- Anonymous, April 30, 2001

Answers

Old Git,

Excellent posting. Warren Buffett has been a real guru about solid investment decisions and this article clearly shows his thinking. I agree with him in what he is saying. One of my other favorite sages is Peter Lynch who managed the Fidelity Magellan Fund. He followed the same principles that Buffett is mentioning.

Too bad that Wall Street pushed the irrational exuberance as far as it did. The shake-out will not be pretty now. It will take down the paper wealth of millions of people and, just as important, set the stage for a deep loss of confidence that could last for many years.

-- Anonymous, April 30, 2001