Warren Buffett Says that We Never Reached 1974 Valuation Levels

Warren Buffett says that this cycle's lows, near 6500 on the Dow and 670 on the S&P were still above the 1974 valuations by any metric that he follows.

If you are like me, you are probably having a very difficult time explaining to others at this point why you are sitting on cash.  As I was watching CNBC this morning, I realized that the only people who face a more difficult explanation are those who are short this market such as David Tice. It has moved in a simply extraordinary way off of the lows of less than 2 months ago.

I was struck however by Warren Buffett's interview on CNBC this morning.  He says, correctly, that he has no idea where the market is going in the short term, and he still believes that the economy is in for a difficult period, but he believes that this is a good time to buy stocks (and all recessions, according to Buffett, offer an opportunity to buy stocks for the long term).  But, says Buffett, there have been better times to buy stocks.  And, he cited better valuations in 1974 and in the early 1950's.

I believe that psychology is not 90% of the market, but is 100% of the market.  Two months ago, investor psychology was very weak and today it is very, very strong.  We are still i nthe middle of a tremendous crisis.  It isn't over.  Therefore, I believe that if psychology were to switch back, we may still see valuations like those that Buffett cites from 1974. 

There are pleenty of reasons why this may not happen however, and one important one is that investor psychology, may remain fundamentally positive through the rest of this downturn.   If that happens, then my hesitance to buy stocks is misguided and I am missing a golden opportunity to get invested.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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  • Jeremy Artish

    May 05, 2009

    The real reason why it isn't going to happen is that there are many more players in the market these days compared with 1974 and more players generally lead to higher prices.

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