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Learn From Buffett's Patience

Back in September, Warren Buffett swooped in and invested $5 billion in Goldman Sachs (NYSE: GS  ) and another $3 billion in General Electric (NYSE: GE  ) . Both came in the form of preferred stock with warrants that allow Berkshire Hathaway (NYSE: BRK-B  ) to buy an equal additional amount of common stock at what was then a fat discount.

Bad timing?
Since then, shares of both companies have been an absolute disaster: Goldman is down around 59%; GE is off 41%. Buffett might have bought preferred stock on enviable terms, but the trend is more or less the same: He's down. Big time.

Now, if that's as far as your curiosity took you, you'd probably conclude that the world's greatest investor was either early or dead wrong about these two companies. And if he can't get it right, can anyone? Is investing just a sucker's game?

Patience, grasshopper
It's true that investing is a sucker's game in the short term. One of the most important Buffett-isms is that his favorite holding period is "forever." That's important, because it captures two of Buffett's key beliefs: (a) compounding is a beautiful thing, and (b) what happens in the short term is completely out of your control.

Perhaps the best illustration comes from checking out Buffett's annual reports. They include a list of the largest publicly traded companies in Berkshire's portfolio, along with the prices paid and the current value of those investments. That list includes the big ones -- Coca-Cola (NYSE: KO  ) , Wells Fargo (NYSE: WFC  ) , and Procter & Gamble (NYSE: PG  ) -- but the company that sticks out like a sore thumb is Washington Post (NYSE: WPO  ) .

Why does it stick out? Because Berkshire paid just $11 million for an investment worth nearly $1.4 billion at the end of 2007 -- a 127-bagger! Of all the stocks listed, Washington Post is the biggest gainer -- by a factor of 12. While relatively small in dollar terms, it'll certainly go down as one of Buffett's greatest investments. 

But do you know what happened to the stock right after Buffett began buying shares in 1973? Shares plunged 20% and stayed there, not for a few months, but for three years. It was 1976 before Buffett was in the black, and it was 1981 before WaPo traded at Buffett's estimate of its 1973 intrinsic value.

Think about that: What ultimately became one of Buffett's greatest investments began with three years of double-digit losses and mind-numbing stagnation. Patience pays, Fools.

Here's another example. In 2002, Buffett disciple Mohnish Pabrai began purchasing shares of Universal Stainless & Alloy Products for around $15 per share. Over the next three months, shares fell by more than 60%. What'd he do? He knew his investment thesis was rock-solid, he stuck to his guns, and he waited -- and he ended up more than doubling his original investment by 2006.

In September, I had the chance to sit down with Pabrai -- and I brought up the fact that famed mutual fund managers such as Bill Miller and Richard Pzena were having absolutely terrible years. Without hesitating, Pabrai interrupted with a powerfully straightforward response: "Don't be surprised if those guys end up outperforming the market by enormous margins over the next few years."

Be patient. Be brave. Be bold.
Fools, 2008 is shaping up to be the worst year in the stock market since 1937 -- and no one knows where the bottom is. Thankfully, you don't have to know. As Buffett's investment in Washington Post proves, finding the bottom and knowing exactly when things will perk up isn't nearly as important as:                                                                           

  • Buying great companies.
  • Paying bargain prices for them.
  • Holding them indefinitely.

Right now, that's exactly what you should be doing. In fact, Buffett himself recently shifted nearly his entire non-Berkshire net worth into U.S. stocks and suggested that others should, too. "What is likely, he said, "is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

So don't wait for the robins -- start searching out those great companies at bargain prices, and be prepared to be patient. If you need a place to start, our team at Motley Fool Inside Value is sifting through the rubble in search of great opportunities. To see what they're recommending right now, click here to try the service free for 30 days. There's no obligation to subscribe.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway.Coca-Cola and Berkshire Hathaway are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. The Motley Fool is investors writing for investors.

Read/Post Comments (8) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2008, at 12:54 PM, Tali1234 wrote:

    I am not sure why so much gah-gah over Buffett.

    He has lost all the gains made in the last five years. This is much worse than many other blue chip companies which suggests that Buffett, like many others, has no clue about what the stock market is doing or will be doing.

  • Report this Comment On November 20, 2008, at 1:17 PM, TraderatWork wrote:

    Tail1234 said

    "I am not sure why so much gah-gah over Buffett...."

    For these are some of the reason.

    1. He is the richest man in the world by solely investing.

    2. He is the BEST CEO of the world and his salary $100K.

    3. He teach us what is "invest" - "Price is what you paid. Value is what you got."

    And he teach a lot of things and lessons about life that your father did not teach you.

  • Report this Comment On November 20, 2008, at 1:42 PM, djemonk wrote:

    All these things are nice if you believe we're going to come out of this "slump" any time in the next few years. Even Buffet has admitted that we could be staring down the barrel of a depression.

    I guess I don't have the confidence that you guys do that buying stocks isn't just throwing money over the edge of a very deep cliff that we won't climb out of for another two years.

    I don't see any reason why I should be investing today when I can just horde cash, wait out some of the deflation, and THEN invest.

    I'm definitely not trying to rain on anyone's parade. I'd honestly like to be convinced.

  • Report this Comment On November 20, 2008, at 2:25 PM, Rnookkeeper wrote:

    Hello, djemonk and others of like mind:

    A famous person said something about the importance of knowing history - I shall let you have the pleasure of finding-out who and exactly what he said, but the point is not to be taken lightly.

    There were some people who, when the banks were closed during the Great Depression and "no one had any money", set up shop on the sidewalk and started lending people money, people who had no jobs and had little prospect of a job in the very near future. Those people who were lending the money became very rich because they had faith that the depression was not permanent.

    Check it out. More than a few millionaires came out of the depression by having the same kind of faith. It might help if you would go and do likewise!

    Best wishes.

  • Report this Comment On November 21, 2008, at 5:18 AM, jameslotp wrote:

    Most people know that to make money one needs to be a contrarian and now in these gut wrenching times, everyone is finding out that to be one is not easy. I believe the beacon in all this is still Buffett, a true contrarian. And his ability to be a contrarian is a belief of long term investing, not speculation. Not believing what the opinion of the mass as reflected in the stock market. I own a business in Asia and during the worst times in 1997-1998, we were still making money. Because no one keeps calling me every hour to tell me how much my company was worth (BASICALLY THATS WHAT LOOKING AT YOUR MONITOR IS), i was not really bothered and went along. i CONTINUED TO PROSPER. I always tell my employees not to listen to coffee shop talk. I know a tycoon who made his first millions in Indonesia during WW2. Talk about bad times.

    So there are still businesses that make money....maybe less or even lose some money but so what. Its in the human character to climb up again and rwalk and then run everytime we fall down. I think if we invest money we dont need anytime soon, this is the best of times to invest...follow Buffett.

  • Report this Comment On November 21, 2008, at 7:40 AM, princetonian wrote:

    The philosophy of buying good companies and keeping them for the long-term bears repeating, as it often is on this site. The thing that people will need to get used to, in order to continue investing this way or adding new investments with this strategy in this market, is that the duration of 'short-term' has to be extended. One needs to be able to stomach not just one or even three years but perhaps five to seven years of uncertainty. Outside of that, you may be setting yourself up for disappointment. If you can stomach it, you'll likely be rewarded handsomely in the long-run.

    This is all implied, of course, in Buffet's sense of "forever." Most folks don't have forever. But if you've got more than five years, and if you invest in solid companies in enduring industries, things should work out fine.

  • Report this Comment On November 21, 2008, at 7:48 AM, KanuckSteph wrote:

    If the so called great investors can't call the bottom, then I guess no one can. So, I figure, following all their advice, start buying now and dollar cost average all the way down, and/or back up. With SPY now paying about 4% in dividends and has potential for capital appreciation, it sure beats buying government debt that pays 3% for a 10-year note.

  • Report this Comment On November 21, 2008, at 9:45 AM, catoismymotor wrote:

    I bought UNT and DRQ in August. Since then we know what has happened to oil and thier service companies.That turned out to be a swift roshambo to my portfolio, for the short term. I purchased them with the idea of holding them for no longer than three years. Even though I have lost 60-70% on each since then I still believe in the companies. I only regret my timing. Like Buffett I plan to hold onto these two forever, or the next ten years. After all, it might take that long to recoup my losses. Ha-ha!


    All of us have an opportunity before us. That opportunity is to learn from the great investors, to become great investors, to teach what we have learned to the next generation.

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