Giverny Capital – 2009 Letter to Partners

What lessons have been learned from the crisis of 2008-2009?

We find it helpful to read historical writings in times of pessimism in order to keep current events in perspective. Abraham Lincoln wrote in 1859:

"It is said an Eastern monarch once charged his wise men to invent him a sentence to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: 'And this, too, shall pass away.' How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!"

It is the nature of our civilization, for better or for worse, to have periods of both economic expansion and economic contraction. When we look at our scorecard, however, our civilization has made constant progress—progress towards a higher standard of living.

But one of the side effects of our system is that during periods of expansion, some participants try to hasten their journey towards greater wealth by using the lever of debt. This works for some time and the neighbor, who considers himself just as intelligent, concludes after considerable reflection: “Why not me?” This continues to work for a while… until a period of contraction presents itself, always without an official announcement. And those who were imprudent are punished. Unfortunately, during several quarters, all participants are punished whether they acted prudently or not.

Many people who have lost their jobs, for example, were forced to sell stock at abnormally low prices. But this wasn’t the case for everyone. Those who have the opportunity to wait for better days should remain emotionally immune against market drops. Because, at some point, the market will rise and reach new heights as the upward human quest for progress return to its historical road.

Economists who attempt to predict such cycles and the market in the short term fail to realize that they need to keep track of several hundred million factors which are the several hundred million human beings who participate in this vast activity. What’s involved here doesn’t just entail tracking a dozen economic indicators. Such economists remind me of the scientists from a thousand years ago who simplistically separated all the elements into four: earth, water, air, and fire.

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But even such a sound philosophy isn’t enough to succeed in the market—another quality is necessary. In 1949, Ben Graham wrote the following in the conclusion to “The Intelligent Investor”:

"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ." (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.) Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”