Many of us are finding ourselves panicking occasionally or even frequently these days as we live in a new coronavirus world of staying home much of the time and perhaps worrying about our jobs and our loved ones. We would probably welcome any wisdom that comes our way, so let's look to master investor Warren Buffett, who has offered many thoughts over the years that can help us make sense of America in a pandemic.
Buffett is turning 90 this summer, so he's been around long enough to have witnessed a lot of history and to have drawn some lessons from it.
The pandemic was not a surprise
While many of us have been blindsided by the COVID-19 pandemic and what it has done to our lives, Buffett, who has been in the insurance business for many decades, expects disasters and catastrophes. In his 2019 letter to shareholders, he noted:
A major catastrophe that will dwarf hurricanes Katrina and Michael will occur -- perhaps tomorrow, perhaps many decades from now. "The Big One" may come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate.
More recently, he said in an interview that "I've always felt a pandemic would happen sometime."
We might not be insurance professionals, but we can learn from this to expect occasional disasters, big and small, in our lives and to prepare for them as well as we can. For starters, we can carry life insurance if anyone depends on our income, and we should have a stocked emergency fund that can cover three to six months' worth of all our living expenses, or even a few more to be more conservative.
Buffett has explained that his company, Berkshire Hathaway (BRK.B 2.68%) (BRK.A 2.46%), is built to withstand big hits: "When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big -- very big. Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day." (Berkshire Hathaway has grown into much more than an insurance company over the years, by the way.)
Not only is Berkshire positioned to survive throughout storms, it's actually likely to benefit from them. That's because when other companies struggle and fail in situations like the one we're in now, they might be open to being acquired by Berkshire. Or they may strike a deal with Berkshire, having it help keep them afloat while being rewarded for doing so.
Here's the kind of gunpowder Berkshire had at the end of 2019: about $125 billion in cash and equivalents and short-term investments in U.S. Treasury bills. Buffett has noted on many occasions that he's always on the lookout for "elephant-sized" acquisitions.
We, too, can aim to be investors who are able to take advantage of opportunities the market presents when stocks are on sale. Buffett is famous for having advised being fearful when others are greedy and greedy when others are fearful. He's worded that in other ways, too, such as, "The disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy."
That's far easier said than done, though. When the stock market has been swinging up and down as wildly as it has in recent weeks, and when many stocks have fallen significantly, it can take courage to buy. It might help to read Buffett's explanation of why we should want to buy at such times:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying -- except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
A key point to keep in mind is that this applies only to long-term investors. And you should only be in the stock market with money you won't need for at least 5 if not 10 years. After all, we've just been reminded of what can happen in the short term.
It's also important to be invested in good, healthy, growing businesses, as they'll be most likely to weather storms. Says Buffett, "It's better to have a partial interest in the Hope Diamond than to own all of a rhinestone."
This pandemic has many of us very worried about America's future and some of us worrying that the global economy will never recover. Buffett would point out that America and the world have gone through other catastrophes, even pandemics. At his 1994 shareholder meeting, he illustrated the value of hanging on through good times and bad:
I bought my first stock in, probably, April of 1942 when I was 11. And since then, I mean, actually World War II didn't look so good at that time. I mean, the prospects, they really didn't. I mean, you know, we were not doing well in the Pacific. I'm not sure I calculated that into my purchase of my three shares. But I mean, just think of all the things that have happened since then, you know? Atomic weapons and major wars, presidents resigning, and all kinds of things ... massive inflation at certain times. To give up what you're doing well because of guesses about what's going to happen in some macro way just doesn't make any sense to us.
At his 2013 meeting, he recalled the 2008 market implosion, saying:
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
Betting on America
Buffett is famous for his long-term faith in America. He has offered variations on the same thought in several of his annual letters to shareholders and in numerous interviews. For example, in a 2017 outlook, he said, "It has been 241 years since Thomas Jefferson wrote the Declaration of Independence. ... Being short America has been a loser's game. I predict to you it will continue to be a loser's game."
One reason to have faith is because of the businesses themselves in which we've invested. In his 2014 letter to shareholders, Buffett said about some of Berkshire's subsidiaries:
A century hence, [the BNSF railroad] and Berkshire Hathaway Energy will still be playing vital roles in our economy. Homes and autos will remain central to the lives of most families. Insurance will continue to be essential for both businesses and individuals.
Similarly, there are many businesses you can be relatively sure will still be around many years from now if they're well run -- think of food and beverage businesses, pharmaceutical concerns, and utility companies.
Here are some last words from Buffett, from his 2014 letter:
If you compare our country's present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America's problems, I've never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).
The dynamism embedded in our market economy will continue to work its magic. Gains won't come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America's best days lie ahead.
The pandemic that's underway is creating a major disruption in the world, but the world is likely to survive it, as it has survived so many wars and other pandemics and similar catastrophes. If you can take Warren Buffett's perspective to heart, you might be able to feel better -- and invest better.