Warren Buffett has seen his fair share of market ups and downs over his career, so his market chops are tough to beat when it comes to giving advice during a rough patch. With the S&P struggling, we asked three of our analysts to chime in with what they believe are some of Buffett's best wisdom. Read on to learn what they picked
Matthew Frankel: Recently, there was a news story about how Warren Buffett may be losing his touch, since Berkshire Hathaway (NYSE:BRK-B) has underperformed the S&P in four out of the last five years. Nothing could be further from the truth.
Buffett freely admits that his investments will tend to underperform when the market is up. However, during negative years for the S&P, and most years when the S&P makes relatively small gains, Berkshire's results have absolutely crushed the market. And this matters so much more to long-term results.
For example, in 2008 the S&P 500 lost 37% of its value, and Berkshire's losses were limited to 9.6%. So, even though the S&P outgained Berkshire over the next two years (26.5% and 15.1% versus 19.8% and 13%), Berkshire shareholders still handily beat the market over that three year period, with a total 26.4% gain as opposed to a cumulative 8.3% loss for the S&P.
As a matter of fact, the S&P has had 11 negative years out of the last 50, and Berkshire outperformed the index in every single one of them. And, Berkshire has only had two losing years in the past half-century.
It is this "defensive" investment strategy that has allowed Berkshire to deliver its incredible long-term performance, and produce consistent market-beating performance over any long period of time.
Jordan Wathen: That's a good point. Warren Buffett understands that the best businesses are those that can grow and pay their owners at the same time. He has his cake, and eats it, too.
In many businesses, growth and shareholder paydays are mutually exclusive. Either the owners take a cut for themselves, or the business plows all of its earnings back into growing for the future.
If you look at some of the world's best-performing companies over the last few years, many of them have the ability to grow while rewarding their owners. Visa, for example, grew its earnings from $800 million in 2008 to $4.9 billion in 2013. Through those years, the amount of money returned to shareholders was several times larger than what it reinvested.
Over long timelines, the ability to grow and pay dividends to shareholders adds significantly to a company's return. Berkshire Hathaway's own See's Candies grew from $5 million in pre-tax profits in 1972 to $82 million in 2007. In between, Berkshire invested only $32 million into the company. For every $1 invested over the course of 25 years, Berkshire is taking out more than $2 in profits every single year!
The best lesson is to buy like Buffett -- buy businesses that can grow without plowing all their earnings back into the company. These are the businesses that will provide for the best returns.
Todd Campbell: I'll pick right up where you leave off and add that Buffett's ability to maintain an almost Zen-like devotion to his tried and true discipline of buying when markets are falling is impressive and rare.
Buffett's strategy of buying great companies for the long haul means that he's unfazed by Mr. Market's inevitable short term drops. Instead, Buffett views these hide-under-your-desk moments as an opportunity to buy.
For example, when the great recession was wiping out bank balance sheets, Buffett was inking a deal for preferred stock in best-in-breed investment bank Goldman Sachs. Buffett's $5 billion investment in Goldman in 2008 netted Berkshire a 10% annual dividend, a 10% premium when Goldman redeemed them in 2011, and -- thanks to warrants he had also acquired -- 13 million Goldman Sachs shares. Buffett made a similar deal in 2011 when Bank of America was feeling the pinch, investing $5 billion in exchange for 6% interest and the right to buy 700 million shares of Bank of America for just $7.14 per share. That deal gave Berkshire a paper profit of $5.7 billion as of earlier this year.
While the average Joe doesn't have Buffett's liquidity, investors can still profit from mimicking Buffett's blue-light-special mentality by keeping a clear head when markets turn south -- like they have been recently -- and buying great companies on sale for the long-haul.