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I first wrote the article in 2016, during a different stock market crash. The wisdom is timeless and I update this post each time the market drops by 20% or more.
Warren Buffett: the ultimate investor and philanthropist. His ability to buy great companies and make them even more profitable is unmatched.
His portfolio includes a smorgasbord of great American companies: BNSF Railways, Coca-Cola, GEICO, and GE are just a few.
He has outperformed the S&P 500 index for over 50 years, an extremely rare feat. His company, Berkshire Hathaway, is worth over half a trillion dollars and only employs 25 people at his corporate headquarters.
I've learned much from reading his writing and advice on investing over the years. He believes in keeping costs low, investing for the long haul, and keeping a calm and long term perspective on the markets.
Mr. Buffett has also pledged to give away the majority of his fortune before he dies. Through the Giving Pledge, he's also convinced many other billionaires around the world to donate their wealth to charity. So not only is he a successful businessman, he's also a great guy.
In the first quarter of 2020, the S&P 500 index is down almost 35%. For me, this was a “loss” of hundreds of thousands of dollars. But I'm not worried.
I know that in the long run, a dip like this actually allows me to buy some shares at a discount. A correction like this could be immensely beneficial for a young investor, who can buy shares in the greatest companies in the world for 35% off.
Wisdom from Warren Buffett's Letter to Berkshire Hathaway Shareholders
Mr. Buffett writes an annual letter to the shareholders of Berkshire Hathaway. He has an amazing way with words and saying things in a way that are easily understandable to the average (or below average) investor and yet profound in their wisdom.
I was reading the 2013 and 2014 editions of his letters recently and found these amazing quotes. Everyone should review motivational quotes like these during market downturns like the bear market in early 2020.
All of these quotes are from the 2013 and 2014 Letter to Shareholders and available in PDF format here. Emphasis is mine.
On the best investment Warren Buffett ever made:
I can’t remember what I paid for that first copy of The Intelligent Investor (now about $13 on Amazon). Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).
On why Buffett continues to buy American companies and tilts towards US stocks, and why index funds are generally the best choice for most investors:
Indeed, who has ever benefited during the past 238 years by betting against America? 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.
In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
On why you need to be in the market and holding cash is actually the far riskier choice in the long run:
Our (Berkshire Hathaway's) investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).
There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities– Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
Mr. Buffett on investing principles like keeping things simple and filtering out the background chatter of “investment predictions”:
You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
Some excellent words of wisdom to reflect on during any market conditions, but especially during bear markets. Through any market condition, continuing to buy a low cost, simple, and globally diversified portfolio of stocks and bonds (like my 2014 asset allocation) in the TSP, your IRA, and taxable investment accounts is always a winning investment strategy.
Do you have any Warren Buffett quotes that you turn to during economic downturns? Are there any other wise people that give you long term perspective during bull or bear markets?