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It started in Soho in the early hours of 1 September 1854.
Over the next ten days, more than five hundred people within 250 yards of a single street corner died of cholera. On the first day alone there were 143 fatal attacks. Within a week, three-quarters of the people in the worst-hit streets had packed up and left.
John Snow, a London doctor, believed cholera spread through water, and he suspected the public pump on Broad Street.
He got the list of deaths from the General Register Office, walked the streets himself, and found nearly all of them close to that pump. On the evening of 7 September he put his evidence to the parish Board of Guardians.
The next day the pump handle was removed.
That’s the story most people will be familiar with. Pump handle removed, cholera ended.
Snow’s book tells a slightly different story.
By the time the handle was removed, fresh attacks had dropped by more than 90% from their peak. He wrote that he didn’t know if the well was even still infected.
He knew where the disease was coming from. Just not when it would strike, or when it would go.
I’ve spent a while with his account of 1854 lately. Not for any medical reason.
“Be fearful when others are greedy” is probably the most quoted sentence in investing, and it follows straight on from Buffett calling fear and greed diseases.
Very few people mention the lines leading up to it. It usually gets taken as a sign to be greedy.
I’ve read the original 1986 letter, the letters around it, and his 2008 use of the line.
I think we have it mostly the wrong way round.
This is the second post in my Misunderstood series. I take a well-known investing saying back to its source and see what it really says.
Here’s what we’ll cover:
What the 1986 letter actually says
Nobody times an epidemic
The word everyone drops
A different well
How the disease travels
What being fearful costs
October 2008: the rule without “only”
Let’s get into it…
What the 1986 Letter Actually Says
Buffett signed the letter on 27 February 1987. The line is under “Marketable Securities”, in a passage about why Berkshire spent 1986 buying bonds he called “mediocre”.
Its insurance companies bought around $700m of tax-exempt bonds that year, most with 8 to 12 years to maturity. “They simply seemed the least objectionable alternative.” On stocks, nothing ticked his boxes: “we currently find no equities that come close to meeting our tests”. That wasn’t a market prediction, he noted.
He then writes:
“What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Read the whole paragraph and the meaning of the sentence changes.
It’s a disease. Fear and greed strike and go away in their own time.
There’s no attempt to time it. “We never try to anticipate the arrival or departure of either disease.” Four sentences of humility before we get to the bit we all know.
It’s a goal. A modest one, at that: “Our goal is more modest: we simply attempt.”
It’s not equal. Be fearful when others are greedy. Be greedy only when others are fearful.
And he follows that paragraph with:
“As this is written, little fear is visible in Wall Street. Instead, euphoria prevails - and why not? What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can’t outperform businesses indefinitely.”
So he was being fearful while others were greedy.
Look at what Berkshire actually owned.
At the end of 1986 it had $1.87bn in common stocks, and 93% of that was in three companies, Capital Cities/ABC, GEICO and The Washington Post, which it expected to own forever. Even if they looked “significantly overpriced”. New money went mostly into bonds and some arbitrage.
Being fearful meant holding on to the companies he wanted to own forever, not adding to anything else, and buying bonds that weren’t very exciting.