Some Advice from Warren Buffet for Difficult Times

There is an alleged ancient Chinese curse, “May you live in interesting times.”

While there is no historical proof of the origin of that curse, there is ample current proof in the securities markets that  we are living in interesting times. It’s simply nasty out there — or at least it feels that way.

The image shows the year-to-date performance of six key asset classes:

• US Total Stk Mkt (VTI)
• Non-US Developed Stk Mkts (EFA) - excludes Canada
• Emerging Markets (EEM)
• US Equity REITs (VNQ)
• Commodity Basket (DJP)
• US Aggregate Bonds (AGG)

Commodities are up, REITs are up but rolling over, and everything else (stocks and bonds) is down.

Click image to enlarge

That made us think about advice from Warren Buffet for difficult times.  Here are some of his comments that may be relevant as investors watch wilting portfolios:

Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.

Our favorite holding period is forever.

If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. … buy a cheap index fund and slowly dollar cost average into it.

We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.

The stock market is a no-called-strike game. You don’t have to swing at everything  –  you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’

Clearly, Warren Buffet did not mean that if you hold a poorly designed portfolio you should hold forever.  He means that if you used good judgement and had conviction when you invested, you should not be troubled by storms, which are always followed by sunshine.

Comments

[JimHawthorne]

We are all both products and prisoners of the era in which we live.
Warren Buffet's era (the 1950's through 1990's) was a time when we, as the last man standing after WW II, enjoyed a period of unequaled prosperity.
Buffet's DOW grew from a value of about 180 at the start of the 1950's to close out the last century above 10,000, or a climb of about 10,000 points in 50 years.

Here's another paraphrased quote from Buffet: "If the market is going to equal it's performance of the last century, it had better get a move on!"

On this at least, we can all agree! As for investing style, we are now in an era when only the nimble will survive!

[CloroxCowboy]

I agree with half of Buffet's mantra above - using fear and greed sentiments to help timing. As Jim points out though, holding forever is probably not the best strategy if you consider that the past 50 years could have simply been an inflationary period in the macro time-scale. I don't expect markets to reverse to 1950's prices, but I do expect them to flatten out considerably. The rest of the world has closed the gap on the US since WWII and we no longer have many of the market advantages that once existed.

With that said, my personal strategy is to buy cautiously and incrementally on downturns such as these. But instead of holding forever, I get really crazy and actually take a profit when prices go up again. People love to say that they got in on a certain company before everyone else, but how many of those people get out at the right time to turn a paper profit into a real one?

[whenmusicstops]

An interesting intellectual named Marvin once said, "Let's Get it On....ooooo baaabby...Let's Get it On"

[cheesecake]

i've lost faith in capitalism, i want a socialist government now.

[Richard Shaw]

whenmusictps and cheesecake

what is the relevance of your comments to the dialog? perhaps some expansion of your thoughts would help

[User 202460]

Wanted to let you know how much I have appreciated your articles, particularly on foreign investment (break down of free float) and the article on emerging markets (stream into the pond). I also appreciate your eclecticism - an ancient chinese curse to open an article on Buffet (timely for me, since I think I've made some good bets, but they certainly aren't playing out right now). Anyway I wondered if you would share some of your sources for information, especially foreign economics and indices performance. So many of the EFTs are two recent to provide any long term performance, so I would love to find a place where I could map/compare the indices out about five or ten years. And if so inclined, any recommendations on the trade journals (WSJ, Barrons, Economist)
thanks again

Mike

[Richard Shaw]

Thank you Mike. Very nice of you to say that.

Your request is a pretty tall order. I use so many sources that I actually have to keep a spreadsheet list of them so I don't forget them. I'd suggest you do the same, because it is sometimes difficult to find some sources a second time weeks, months or a year later when you need them.

Some in the international category you mentioned that are most frequently useful are:

MSCI BARRA,
S&P CITIGROUP GLOBAL INDICES
UNITED NATION,
OECD (Organization for Economic Cooperation and Development,)
CIA FACTBOOK.

There are others, but these are good "work horses".

As for the three magazines you mentioned, I personally find Barron's and the Economist more interesting than the WSJ, but all three are important to read regularly -- put Bloomberg and the Financial Times (London) in that list too.

I personally feel it is important to read the business news in other countries, such as the Kahleej Times (U.A.E.), Hindustan Times (India), China Daily (China), Nikkei Net (Japan).

A good multi-country new service (but for a subscription of $40/mo) is EINnews

Then when you find an article that intrigues you, Google the names of the people or the names of the institutions, companies or ideas and follow the trail around the web to fill out the news which comes from unpredictable places.

This is not a comprehensive answer, but it should give you a good start on your information quest.

All the best to you.

Richard

[Tom B]

I agree with the first two posters. In my view, Buffett may have been more lucky than smart. I LIKE the idea of "buy and hold forever", but there are SO many former Wall Street darlings that have been unable to adapt to the 21st Century and are slowly going the way of the Dodo bird: Dell, Microsoft, GM, Sony, Ford, Verizon, Motorola. Maybe PFE-- I hope not; I hold some. In this century, nimble is the by-word. Serve no wine past its time; hold no stock past its prime.

[Richard Shaw]

Tom,

You may be right, but it is important to differentiate between holding forever, regardless of the facts, and holding steady during a storm with companies that continue to earn your confidence in general. That is perhaps the more important message. The fear reaction is so strong that investors tend to dump at the worst time and then fail to reopen positions they like until much of the loss they took has been recouped by the market, but not by the investor.