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 in the past year as Berkshire Hathaway (NYSE: BRK-A  ) followed the market straight off a cliff.

In response to the market panic, Buffett penned an op-ed in The New York Times last fall to announce that he was buying U.S. stocks for his personal portfolio. Shortly afterward, stocks fell off a cliff, and the economy has been nothing short of awful.

And while stocks have since rebounded off their lows, it wasn't before Buffett received an onslaught of criticism that caused some to wonder: Has the Oracle of Omaha lost his touch?

You cannot be serious
Simon Maierhofer was one of those criticizers. 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 10 years ago was smack in the middle of the dot-com boom, when tech companies like Hewlett-Packard (NYSE: HPQ  ) and IBM (NYSE: IBM  )  -- and even notoriously bland companies like Merck (NYSE: MRK  ) and Verizon (NYSE: VZ  ) -- traded as if a guarantee of perpetual sunshine were carved in stone. Since then we've seen not one, but two bubbles burst. The fact that trailing 10-year returns look terrible 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. Typically 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 volatile, especially 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.

Even better, as fear over this Great Recession rules the market, companies with a history of proven long-term returns -- companies like Altria Group (NYSE: MO  ) and Johnson & Johnson (NYSE: JNJ  ) -- trade at prices that set investors up for seriously attractive returns going forward. 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 first published Nov. 24, 2008. It has been updated.

Fool contributor Morgan Housel owns shares in Berkshire Hathaway, Altria, and Johnson & Johnson. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. The Fool owns shares of Berkshire Hathaway, and has a disclosure policy.


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  • Report this Comment On September 16, 2009, at 7:44 AM, Arill wrote:

    How is is possible for Simon Maierhofer to criticize Buffett's cash is trash philosophy by using the past ten years, when over the past ten years, Buffett didn't have that view. He changed his view recently as prices changed.

    He was one of the few who warned of high stock prices over the past decade, so this criticism is ridiculous.

  • Report this Comment On September 16, 2009, at 1:03 PM, Investable1876 wrote:

    For years, Mr. Buffett was the greatest stock market investor of all time. Indeed for almost four decades. However, in September of 2008, something amazing happened. A sudden shock to the financial markets occurred in which several banks failed, banks which had been around for over a 100 years. Banks which had survived a decade of The Great Depression. They failed. Huge financial organizations failed. The Big Three Auto Manufacturers are on the verge of failing. And, the headlines screamed all this bad news. In the midst of this whirlwind of disaster, Warren Buffett was quoted in gleefully exclaiming: "I've been waiting for this day for ten years!" Warren Buffet knew the secret - that the flip side of financial disaster is gigantic opportunity.

    ----------------------------

    Money is like muck, not good except it be spread.

    http://www.topinvestingtips.com

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