Buffett-Bashers Should Get Some Perspective

By Alexander Green

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.

Since Warren Buffett’s column originally ran, on October 14th, 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.

Comments

[Kevin Walmsley]

Well, you'll forgive me for wanting to excluse the 1926-27 period as a great buying opportunity, considering how few of those investors were smart enough to hop off the bus before it plunged over a clilff two years later.

Suppose this isn't a normal recession, but a credit cycle unwinding what happens only once every 75 years or so. One could make a compelling case--and I do--that we're not likely to see 14,000 in five years, or possibly even ten. But suppose it takes 10: going from 8,000 to 14,000 in ten years--that's an annualized return of 6.5%, well within historical norms for stocks. How many investors are willing to jump into stocks today, if they figured they could count on 6.5% percent?

Sell on strength, assuming you're able to find any.

2008 Dec 09 11:13 AM

[User 232593]

like mr. buffett really cares whats said about him.at least he didnt deal phony rated AAA worthless paper.the anal sts dont know anything.never did.

2008 Dec 09 11:22 AM

[Jason Rines (iThinkBig)]

Full agreement with Mr. Buffet's five year buy and hold strategy. Look at this chart (sorry u will have to cut and paste):

books.google.com/books...

If history rythmes, the cause of this crash and subsequent deep recession/depression are the same as the Great Depression. The duration length or outcome may be longer or shorter but if we are going to compare Mr. Buffet historical logic of buying now and holding for five years. then this strategy should indeed yield him incredible returns.

Ultimate worse case scenerio/risk is massive global military misadventure. In that case, we're all screwed but even in that case it historically takes several years for major hostilities to break out (1907 crisis to WWI in 1914, 1929 crisis to WWII 1939).

2008 Dec 09 03:05 PM

[Jason Rines (iThinkBig)]

Oh, I guess the link worked, perfect. I own no Berkshire, not connect with Mr. Buffet in any way and no, I am not your ass-kissing type.

2008 Dec 09 03:07 PM