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.
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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