Kurt Brouwer October 17th, 2008
Warren Buffett is renowned as an investor. In this piece from the New York Times [emphasis added; free registration my be required], he distills his investment philosophy into clear principles:
Buy American. I Am. (New York Times, October 16, 2008, Warren E. Buffett)
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
For many people who read the first paragraph in Buffett’s column, the next paragraph would be inexplicable. With all the problems going on in the financial markets and the economy, how could he buy stocks? Yet, he is doing just that and may soon hit 100% in stocks for his personal account.
…A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”…
Mr. Buffett’s calm historical analysis belies much of the frenzied coverage we see — and hear — daily on the fluctuations of the markets and the economy. His primary point is that an investor has less risk at play if he or she investors when conditions are gloomy because stocks have been marked down. In this financial environment, not only have stocks been marked down, but most other assets as well including high quality corporate and municipal bonds. It’s a buyers’ market provided you have the fortitude to stick it out until things turn around.
If you want to share in Buffett’s professional work, you can buy stock in his company, Berkshire Hathaway, which operates much like a closed-end mutual fund. Or, you can buy shares in mutual funds that own sizeable stakes in Berkshire Hathaway. The best-known of these funds is Sequoia Fund, which recently re-opened to investors (see Sequoia Fund To Open Up Again).
Via: Steve Janachowski
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