Larry Sarbit of Sarbit Advisory Services recently wrote an article about rear-view investing. He was trying to answer the question how can the stock market go down or be flat for years, while the US GDP growth remain stable and climbing?  Warren Buffett answer is investors behave in very human ways. They get excited in bull markets and make the recurring mistake in looking in the rear-view mirror, regardless of overvaluation.

When they look in the rear-view mirror and see a lot of money having been made in the last few years, they plow in and push and push and push up prices. And when they look in the rear-view mirror, and see no money having been, they say this is a lousy place to be. From a speech in 2001.

Mr. Sarbit says the average investor buys recently posted great results, they buy stocks after great returns have already been achieved. Most do not participate in the capital appreciation of the stocks.

From Mr. Sarbit’s view is the market valuation is high and at some point there will be a correction.

Linking to dividend paying stocks, Mr. Buffett believes in buying great stocks after they have declined in value. Otherwise he watches a number of stocks and when they have declined in price, because of the insurance companies ability to generate cash he can then buy a large block of shares to see them increase in value because the companies are well run and have the capacity to return to better prices. Some of the companies will be near monopolies, but try not to pay too much. Good investors should look forward as well in the rear-view mirror to see the alternatives and opportunities should markets go up or down.

There are more questions than answers, till the next time – to raising questions.