A young Warren Buffett discusses the historical accuracy of the stock market as a forecaster, noting its inconsistent performance. Over the past five years, despite stagnant corporate profits, stock prices have surged by approximately 50%. Buffett believes this could be a correction of a previous incorrect forecast. He also addresses the recent market decline, attributing it to forced selling due to margin calls and poorly secured bank loans, creating a downward self-generating mechanism.
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00:00The stock market has been a good forecaster from time to time in the past. It also has
00:04been a rather poor forecaster occasionally. For example, the last four or five years,
00:09the stock market has been booming along and presumably forecasting better business,
00:13which has really not materialized. Corporate profits are not any better than they were
00:18five years ago, but stock prices are 50% higher thereabouts. So maybe the stock market is really
00:24correcting a previous incorrect forecast this time rather than making a new correct one.
00:28Well, in a nutshell, Mr. Buffett, can you give us your opinion of just exactly what happened?
00:34What caused it? Well, there was undoubtedly some forced selling the week when the stock
00:40market hit the news. The previous week, prices had declined about 6% for the week on average.
00:47And there was some stock that was forced upon the market both by margin calls from brokers and
00:53some that was forced out by improperly secured bank loans. And this, in turn,
00:59set up a self-generating mechanism on the downside for a while,
01:02which we may have seen the last of and which we may not have seen the last of.