Investment Wisdom in Buffett’s Letter to Shareholders

Investment Lessons From Warren Buffet

Perhaps, like me, you’re an avid index fund investor. Even so, I love reading Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway corporation. They’re full of wisdom – not only in how his company is currently operating (in plain language), but also in a variety of other topics.

Why yes, since you ask, I do own the book Snowball about Warren’s history, have seen the HBO documentary on his life, and have a book that now looks to be out of print of Warren’s past letters to shareholders. Yes, I’m a personal finance nerd. There’s a club of us, and we meet in Omaha at the capitalist version of Woodstock.


The Gem This Year

And in the 2016 letter (read the full thing here) Warren does not disappoint. He gives us these three great paragraphs to remember when things get rough-and they will. From Page 6 of this years letter:

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. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

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.

Investment Lessons From (1)

My Experience in 2008 and 2009

It was the first time I ever had a sign that my husband was really listening when I talked about all this nerdy personal finance stuff. The market was going down, down, down. I had a sum of money invested at the time (I was 27-29 through this period), which represented years and years of savings. As I talked about when giving you tips to hack your way into maxing your 401k, and my guest post on my career, I used to be quite the low earner. I had what was to me at the time a significant amount invested, and there was blood in the streets.

The house I had bought in 2006 was crashing in value. My companies stock, after hitting a high of over $100 per share, was under $4 a share. My company had to have a TARP bailout to the tune of $4 billion. My husband lost his job in 2009, with his factory closing. And my investments, hard-earned and saved over years, were evaporating. Years and years of sacrifice, hard work, and dollar cost averaging were gone in days.

Those of you who didn’t invest during that time can’t understand what it was like. I certainly didn’t. I had read all the books. I understood that the market went down, and thought I could hold on through anything. But it was terrifying. We had two young kids, my husband lost his job, our house value was collapsing, and it looked like the financial system was going to come undone.

After another triple digit loss, when I thought I just couldn’t take it anymore, I said to my husband “I’m getting scared. When is this going to end? Maybe I should just sell everything and put it in case.”

He looked at me and said, “Liz, don’t you remember what Warren Buffett always says? Be greedy when others are fearful, and fearful when others are greedy. Just hold on. It’ll be all right.”

I stared at him, surprised. I’m the personal finance nerd in the family, as I’m sure you can tell from this article, all my other posts, and the fact that I blog about personal finance and investing – as a hobby.

Side note – the coolest hobby in the world!

I would occasionally (frequently) talk to him all about my latest financial interest, the cool book I’d read or site I’d found, and all kinds of investing concepts. This was not his hobby, but he always looked at me, smiled and nodded through our (my) conversations, and would look at our net worth statement every few months. I had no idea he had actually internalized the lessons I’d been preaching.

So the student had become the teacher. I didn’t sell, and kept dollar cost averaging right into the same funds I had before the financial crisis. And guess what? It came back, and more. Since I dollar cost averaged right on through, my investments since that time have gone from the S&P 500 low of 676 all the way through today where it’s 2300. Some quick math will tell you that it’s doubled – twice.

Unpacking Warrens Advice For Us

So Warren is telling us there will be more crashes. We don’t know when, and we don’t know how bad they’ll be, but they will come. After living through 2008/2009, the smaller dips don’t bother me at all.

So let’s unpack the key points behind what Warren, the Oracle of Omaha, is telling us. The key is in that last sentence:

  • Investors who avoid high and unnecessary costs – Don’t invest in hedge funds, actively managed expensive mutual funds, high-fee investment options, or other investments that will cost you a lot. You can get great value at a low cost – in an index fund.
  • and simply sit for an extended period – Don’t panic and sell, and don’t put money into stocks that you need in the short term. Take Ron Popiel’s advice and “set it and forget it”
  • with a collection of large, conservatively-financed American businesses – Diversify your investments. Invest with large, well known companies, like in an S&P 500 index fund
  • will almost certainly do well – There are no guarantees. But investment history tells us that after all crashes, there is a recovery. Even after the Great Depression, investors who held on eventually made their money back.

So those are the keys to a successful investment strategy – low costs, long time horizons, conservative (not speculative) stock investments, and patience.

In case you don’t get the Ron Popiel reference, here you go:

I Want To Hear From You!

What did you think of Warren’s 2016 advice? What’s your favorite Buffett saying that you find yourself repeating all the time? Let me know in the comments!

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19 thoughts on “Investment Wisdom in Buffett’s Letter to Shareholders”

  1. I can say this from the safety of a pretty steady climb in the stock market over the past 6 years, but I remind myself a crash is just like a really good sale on stock. I’m not sure I’ll feel that way when the inevitable crash happens, but I hope I will. Good stuff today!

    1. I can say from experience, having invested through two market crashes (the tech crash and the Great Recession) that it’s a lot harder than you think it will be. Watching years and years of hard earned savings and investments evaporate in days is very difficult. It’s certainly worth it in the end though.

  2. ReachingTheCrest

    Whenever someone is talking to me about individual stocks and what the stock market might do i remind them that even Buffet admits he has no idea what the stock market is going to do from day to day. He is amazingly optimistic that over the long run the market will go up because our country’s economy is so huge.
    He also loves to recommend large index funds for the individual investor. So simple and yet so many people mess it up.

  3. DadsDollarsDebts

    I learned 2 things here:
    1) We are the same age!
    2) You married a smart man.

    I was not even paying attention to the stock market at that time. I was paying to the housing market, upset I had not waited a year longer to buy my home at rock bottom prices but hind site is 20/20 (I also should have kept that house instead of sold it as it is now worth double!).

    I liked Buffet’s latest letter. It was the typical sage advice. America is fine. Don’t fret what the government may or may not be doing. Buy low cost index funds. Always save and hold.

    Thanks for the post!

    1. Yes he is! I also was regretting my housing purchase at the time. I bought my house in early 2006-pretty much at the peak. The only good part was that I also had sold a property to buy that house. I had bought a condo in 2000 so (entirely accidentally) made a killing on that sale. So it evened out, I guess. 😀

  4. I think that’s great advice from Buffet and appreciate it being relayed and broken down by you! I was in a very similar boat as you during 2008-2009. Fortunately, neither my wife or I lost our job, but we were afraid that would happen any day we went to work.

    We had saved for years which was almost wiped out. It was my older brother who had to talk me off the edge. I remember the phone call and I was upset and ready to bail. Thankfully I kept my investments going and continued to invest more as the market bounced back (just like it always does). What a tough first dip to go through though, huh?!

    Buffet’s advice is timeless, and I’ll make sure to reference it once again during the next major market drop.

    1. It really was rough-I now know that if you haven’t lived through a market downturn, you can’t really understand how it feels. I thought I would be rational-I had read tons of books, gone through Buffetts advice, and thought I’d be a buyer. But I didn’t understand how I would really feel until it happened. Glad we both had people to talk us off the edge back then!

  5. Nice post. Its good to constantly remind ourselves of Mr. Buffet’s mindset during crashes because like you mentioned, I’m sure its easier said than done. I was just starting my career in 2007, so it was really perfect timing for my 401k. I just wish I could go back and put even more money in to it.

    1. Hindsight is 20/20, right? I also wish I could go back and make different decisions, but overall I’m happy that I just did nothing and kept dollar cost averaging into the market.

  6. High Income Parents

    I had lucked out and just started reading about John Bogle and passive index investing in 2007. I had put my 401k to cash and was looking into what I wanted to do. I just started my career then so I didn’t have very much anyway.
    Since then, having a taxable account has helped me with the ability to “do something” in the face of a downturn. Even last January when we had a 10% correction, it was helpful to be able to tax loss harvest so that I felt like I was contributing to my accounts overall production in the face of a downturn. In addition my monthly contribution helped me feel better about the buy and hold mentality by dollar cost averaging. If I focus on the positives it helps the negatives not be so bad.

    1. For people bay started their investment journey in 2007-2009, they had a great opportunity! Their starting investments were all at a market bottom and there was no where to go but up. Unlike me-I started investing in the late 90’s, so I got to experience the entire “lost decade” of investing where the S&P gained nothing.

  7. Matt @ Optimize Your Life

    I was not yet in the market for the 2008 crash, so while I have internalized all of the lessons, I have not yet had that emotional test that you went through. Congrats for successfully making it through and holding your resolve (even if it did take a little help!).

    I love how Warren Buffett has one main piece of advice for average investors and yet somehow keeps finding new ways to present it.

    1. Yes he’s the master of saying the same thing a hundred different ways, but in a way that doesn’t sound like he’s repeating himself. It’s also good to know that sound financial management and investing principles don’t really change!

  8. I love this post, Liz! I remember the panic of those days–my grandmother pulled tons of her $ out of the stock market at its lowest on the terrible advice of my uncle. I was livid and she lost tons by not holding steady like you did! Isn’t it awesome that your husband was right there with the perfect advice just when you needed it? I live when I realize mine has been listening, after all! 🙂

    1. I was so surprised that he was actually listening to all my ramblings about Buffett over the years! 😀 Today I’m very glad he was there to keep me steady back then. It kept me dollar cost averaging through the crash.

  9. Thanks for unpacking Warren’s lessons and sharing your story. Fortunately, most of my money was in retirement savings in 2008 so I didn’t touch it but in hindsight wish I would have increased contributions. Love that your husband steadied you back then.

    1. Buffett is awesome, and always has sage advice we should listen to. Most of my money was also in retirement savings, but it was still scary to watch it evaporate. So I used the “ostrich” method of personal finance and stopped looking at it for a while.

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