This Is Why Buffett's Buying Stocks

You think you've had a bad year? Poor Warren Buffett has seen more than $25 billion evaporate from his net worth as shares of his company tanked in recent months.

Adding insult to injury, he's been criticized for the awful performance of investments in Goldman Sachs and General Electric. In addition to preferred shares that pay 10% dividends, he got warrants for common shares at what seemed like great prices -- prices that are waaayy higher than where the stocks are currently trading.

In response to the market panic, Buffett penned an op-ed in The New York Times last fall saying he was buying U.S. stocks for his personal portfolio. Since then, stocks have been in freefall the economy has fallen off a cliff.

This raises the question: Has the Oracle of Omaha lost his touch?

Seriously?
Simon Maierhofer thinks so. In fact, he took issue with Buffett's claim that stocks will outperform cash in the coming years:

How did [Buffett's] "cash is trash" philosophy fare over the past 10 years? $10,000 invested in the S&P 500 exactly 10 years ago would be worth $7,500 today. The safest cash equivalent, [Treasury bills] ... would have returned about 30%, putting you at $13,000. We don't encourage investing by looking in the rear view mirror but a look at the numbers shows that the only bull market right now is in cash.

Let's leave aside for a moment the question of inflation, which ensures that the $10,000 of 10 years ago is not, in fact, the equivalent of $10,000 today. What does the market's performance over the past 10 years suggest for the future?

Up, up, and away 
Any 10-year retrospective has to contend with the fact that 1998 was smack in the middle of the dot-com boom, when tech companies like Intel (Nasdaq: INTC  ) and Dell (Nasdaq: DELL  )  -- and even notoriously bland companies like Citigroup (NYSE: C  ) and Pfizer (NYSE: PFE  ) -- traded like perpetual sunshine was carved in stone. Since then we've seen not one, but two bubbles burst. The fact that trailing 10-year returns are pretty bad is hardly news.

But if we look at 10-year returns for the Dow Jones Industrial Average over the past 100 years, a pattern emerges:

10-Year 
Period

Dow Jones Industrial 
Average Return

1998-2008

(9%)

1988-1998

331%

1978-1988

165%

1968-1978

(19%)

1958-1968

77%

1948-1958

226%

1938-1948

14%

1928-1938

(49%)

1918-1928

254%

1908-1918

60%

After booms come busts, after busts come booms. That's how markets work. If we had chosen a different frame (i.e., ending in 2006 instead of 2008), the numbers would likely be different, but the overall pattern would be the same. Markets go up, markets go down. Usually right after each other.

This isn't a short-term, cherry-picked set of data, after all. It's 100 years of market returns, during which time the nation overcame two world wars, four smaller wars, a flu epidemic, the Great Depression, civil uprisings, multiple recessions, oil shocks, and terrorist attacks -- not to mention sideburns, Chia Pets, Carrot Top, and boy bands.

Anything can happen in the short term -- and the short term right now is chaotic and volatile like never before. Yet over the long term -- going back an entire century -- the trend of the stock market is pretty clear.

It's time to be brave
Yes, stocks are scary right now. Yes, there will be boom times and bust times -- and the busts are no fun, even when we're resigned to their presence. But if you want your money to earn you adequate post-inflation returns over the long haul, cash isn't going to get you there. Never has. Never will.

Not only that, but as fear, panic, and forced liquidation rules the market, companies with a history of proven long-term returns -- like Caterpillar (NYSE: CAT  ) , ArcelorMittal (NYSE: MT  ) , and Ingersoll-Rand (NYSE: IR  ) -- now trade at levels that would have been unthinkable just years, if not months, ago. Anyone who thinks holding cash or buying Treasuries at historic highs in lieu of stocks at historic lows is making a mistake they'll almost certainly regret down the road.

None of this is to say we've reached a market bottom. Historical earnings multiples, for example, suggest that more pain could be in store for investors. Some periods of market lethargy have indeed lasted for longer than 10 years, too.

Nonetheless, the trend is as true today as it's been for the past century: We're at a point where bargain-hunting investors can be as assured as they've been in decades that stocks will perform well in the long term.

Our team at Motley Fool Inside Value is sifting through the rubble in search of the bargains that will translate into long-term 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.

This article was originally published on November 24, 2008. It has been updated.

Fool contributor Morgan Housel doesn't own shares of any companies mentioned in this article. Pfizer is a former Motley Fool Income Investor recommendation. Pfizer, Dell, and Intel are Motley Fool Inside Value selections. The Fool owns shares of Pfizer and covered calls on Intel. The Motley Fool is investors writing for investors.


Read/Post Comments (9) | Recommend This Article (40)

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  • Report this Comment On March 04, 2009, at 4:24 PM, hungry4food wrote:

    the only problem is the matrix for disolving inflation is gone , with the final development of the cheaper labor and production areas of the world being fully engaged in the rise of wage and their desire of an increase in their Quality of life , we face today going forward inflation for goods and services , that at the begining of the Reagan era he was able to disolve our domestic inflation issues into the 3rd world with the development phase of their societies as we were at the same time lower of costs of production , of our goods and eventually services as well , all of this now coming full circle from the isolated USA domestic inflation woes we were experiencing in the 1970s , to now the begining of an era of international Inflation to reach around the world as the world demands for more and more quality of life intervention into their ways of life , and why not , if peace is the goal ?????

    But how we counter the pace of inflation so that debts are kepted in balance , but at the same time we are able to promote and inspire innovations that are not just volume production oriented , so that product saturation is not our issue that keeps creating the volatility in our capital markets over and over , is what is missing from the monetary policies , and the use of alternative markets of wealth generation like the hard currencies markets can act as a stablizing shock absorber to the way we inject credit and drive production to meet anticipated demands of the population growth factors , so that value can be sustained in all sectors of markets that can then maintain a diverse and complex advancement of the needs of world societies .

  • Report this Comment On March 04, 2009, at 5:21 PM, jvinijvini wrote:

    I just read another Fool article saying that while Buffet is purportedly buying stocks, he has actually been selling at a rapid rate and this is reflected in his latest report.

    http://www.fool.com/investing/general/2004/03/04/buffett-sel...

    This does not really bode well for investors, but I do agree that in the long run we're better off in stocks, depending on one's time horizon.

    I do wonder which Fool author is correct? Unfortunately, I think it is the one that shows

    Buffet's sales.

  • Report this Comment On March 04, 2009, at 5:31 PM, TMFHousel wrote:

    jvinijvini,

    The article you point to showing Buffett's sales is over five years old.

    -Morgan

  • Report this Comment On March 04, 2009, at 6:49 PM, CatFoodMoney wrote:

    i've read this article before and i enjoyed it even more this time. i like to be reminded that the market will one day recover. i know it will, but sometimes it's easy to get to feeling like all of humanity is doomed to return to the stone age

  • Report this Comment On March 04, 2009, at 7:23 PM, JarVanderbilt wrote:

    It's easy to support any argument when you cherry pick the highs and lows.

    A better metric would be to compute appreciation over 10 years after the market has declined 50%. That is where we are today. Even computing from a 30% decline (about where Buffet started moving in) you'll see his motivation.

    Don't lament for Buffet and his followers. They live much more modest and sustainable lives than the majority of the soon to be unemployed Ivy League sheep on Wall Street.

  • Report this Comment On March 05, 2009, at 10:30 AM, alexwong0708 wrote:

    While Buffett wrote that he would buy buying American, there are other alternatives that are better for Berkshire, such as preferred shares. This is what normal investors can't touch. We do have to say his investments in GE and GS are quite brilliant.

    He also did mention he is buying American in his own portfolio, not Berkshire.

  • Report this Comment On March 05, 2009, at 11:22 AM, SteveTheInvestor wrote:

    Time to be brave.... indeed. My view though is that there is always a fine line between brave and stupid. I don't see the line clearly at this point.

  • Report this Comment On March 05, 2009, at 2:32 PM, dividendgrowth wrote:

    Buffett was selling stocks at a rapid rate in Q4 2008.

  • Report this Comment On March 05, 2009, at 3:50 PM, alexwong0708 wrote:

    While Buffett wrote that he would buy buying American, there are other alternatives that are better for Berkshire, such as preferred shares. This is what normal investors can't touch. We do have to say his investments in GE and GS are quite brilliant.

    He also did mention he is buying American in his own portfolio, not Berkshire.

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