by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Monday, December 8, 2008: Issue #897
Not long ago I excerpted a recent New York Times column by Warren Buffett explaining his take on the recent market sell-off.
Despite the dour economic outlook, Buffett expects U.S. companies to report record profits within five years. He is getting fully invested in stocks in his own personal account.
Perpetual Money Machine
Since Warren Buffett’s column originally ran on October 14th, however, the S&P 500 has dropped 13%.
Hardly a day goes by that I don’t get emails telling me that Buffett “blew it.” He was “too early.” Or he “failed to call the bottom.”
I beg to differ …
Warren Buffett’s Economic Outlook
For the record, here is part of Warren Buffett’s column that I excerpted:
“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.”
Let’s assume for a moment that Buffett is right and five years from now U.S. companies are reporting record profits.
Since we know that share prices follow earnings, the market will likely have met or exceeded its old record high. (The Dow crossed 14,000 in early October 2007.) Investors who bought good quality stocks at current levels will be in excellent shape. So will those who merely reinvested their dividends.
To clarify, let’s try a thought experiment: Today is December 8, 2013. The Dow is at 14,000. Looking back, you can now choose any one of these three options - and magically reinvent history.
Over the past six years:
* The Dow soared from 14,000 to 18,000 and has now declined to 14,000.
* The Dow treaded water and rarely traded much higher or lower than 14,000.
* The Dow sank to less than 8,000 and has since climbed back to 14,000.
With the luxury of hindsight, which scenario would you prefer?
If you’re in the wealth accumulation phase, clearly the best answer is #3. It may have been scary, but this was the only scenario that offered you the maximum opportunity to buy low.
Investing Like Warren Buffett - Not The Average Investor
That’s why, unlike the average investor who is sitting on his hands (except to bite his nails occasionally), Warren Buffett is actively buying stocks.
Some will counter that this is likely to be a steep recession and stocks may go substantially lower.
Buffett surely know this - and clearly reasons that this only makes option #3 more attractive.
History shows that most so-called market timers will either never move or move far too late. They’re comfortable in cash because they believe - quite rightly in my view - that the economy will only get worse.
But think hard - and read your history - before you opt out of the market entirely. Yes, the Dow sometimes falls during a recession. But, perversely, other times it soars.
For example, in the 13-month recession in 1926-27, the market went up 41.1%. In the 8-month recession in 1945, it went up 19.5%. In the 11-month recession in 1948-49, it went up 15.2%. In the 10-month recession in 1953-54, it went up 24.2%. In the 10-month recession of 1960-61, it went up 20.3%. In the 16-month recession in 1981-82, it went up 14.6%. And so on.
In my view, investors who are cursing this market are either spending far too much time listening to the “end-of-the-worlders” or stuck looking back, not forward.
If Warren Buffett is right - and he has a long history of being just that - these investors are moaning at opportunity’s door right now.
If you want to meet your five- and 10-year investment goals, imagine yourself five and 10 years from now. Ask yourself what you will wish then that you were doing with your money today.
Then govern yourself accordingly.
Good investing,
Investing Like Warren Buffett: Take Your Cue From the World’s Best Investor
Labels: Investor