One of the best investors the world has to offer would be Warren Buffett. From 1965 to 2016, the Oracle of Omaha managed to generate a fantastic annualised gain of 19.0% in the book value per share of his company, Berkshire Hathaway. During the five-plus decades from 1965 to 2016, the world had seen numerous stock market booms and busts, with the most recent big-crash being the 2008 financial crisis. Despite all the volatility, Warren Buffett had stuck with his investment philosophy while holding the firm conviction that “this too shall pass” when confronted with huge macroeconomic issues and/or major…
One of the best investors the world has to offer would be Warren Buffett. From 1965 to 2016, the Oracle of Omaha managed to generate a fantastic annualised gain of 19.0% in the book value per share of his company, Berkshire Hathaway.
During the five-plus decades from 1965 to 2016, the world had seen numerous stock market booms and busts, with the most recent big-crash being the 2008 financial crisis. Despite all the volatility, Warren Buffett had stuck with his investment philosophy while holding the firm conviction that “this too shall pass” when confronted with huge macroeconomic issues and/or major stock market falls.
How does Buffett do it and what does he think about short-term price declines? We can get some clues from the vast library of quotes he has given in his company’s annual reports over the years.
The first quote is from Buffett’s 1994 Berkshire Hathaway Shareholders’ Letter (emphasis is mine):
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
The late Ben Graham was Warren Buffett’s investing mentor and former boss, and is often touted as the father of value investing. Just like Graham, Buffett does not bother about economic and political forecasts when investing, since they don’t offer any meaningful information. What matters to Buffett is that the business he is invested in is still fundamentally sound. Great businesses bounce back fairly quickly after a crisis.
The second quote is from Buffett’s 2011 Berkshire Hathaway Shareholders’ Letter (emphases are mine):
“If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.
Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”
As investors, we should have long time horizons. Most of us would be investing for our retirement anyway, which is years into the future. So, why worry about short-term market declines when we’re investing for something which is more than 10 to 20 years away? In fact, when the market falls over the short-term, opportunities to buy wonderful businesses at great prices occur.
The third quote is from Buffett’s 2016 Berkshire Hathaway Shareholders’ Letter (emphasis is mine):
“American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.
Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks….
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
In his 2016 letter, Buffett said that every 10 years or so, dark clouds would fill the economic skies, which would then “briefly rain gold”. When such a downpour happens, we should run outdoors with big wash tubs and not small teaspoons. Lightning does not strike twice at the same place. Therefore, when a crisis hits, we should keep our fear away as that would be a detriment to our portfolio. Instead, we should be greedy when others are fearful and load up on stocks.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.