Back in October 2008, the S&P/ASX 200 closed as low as 3,800 points. Only one month earlier, it had closed at almost 5,000 points – a drop nearing 25% in a month. The index had fallen almost 45% from its all-time high on November 1, 2007.
For those like me, who are fans of Warren Buffett – the world's 3rd richest person, according to Forbes magazine and the man considered by many to be the greatest ever investor – October 2008 was notable for another reason. On October 16 of that month, Buffett wrote an Op-Ed for the New York Times entitled 'Buy American. I am'.
He didn't ignore or sugar coat America's problems. In fact, he laid them out in his first 4 sentences:
"THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary."
But then in the very next sentence came the kicker:
"So… I've been buying American stocks."
Why? Well, Buffett being Buffett, he gives us an answer almost immediately in one of his most often cited sayings – 'be fearful when others are greedy, and be greedy when others are fearful'. He doesn't claim any expertise in timing the market, however, saying:
"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month — or a year — from now."
But then this:
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
That's fine for America and Warren Buffett, but what's in it for us? I'm glad you asked.
The S&P/ASX 200 closed at 3,971 on the day that article was published. The index had fallen another 15% by around the same time one month later, and had dropped to 3,145 within 5 months – a total drop of 20% since Buffett's Op-Ed.
And in the 2 years since March 2009? The market stands around 4,700 – a full 50% from the post-GFC low and up 18% since the New York Times published that article.
Buffett's message is clear, and it's as relevant for Australian investors as it is for Americans.
We will have setbacks. Share prices will drop. Things will look grim from time to time. But Australia's best businesses will have higher profits in the coming years – and many of those will be much, much higher in 10 or 20 years.
Buffett's Simple Advice
Warren Buffett's investing success is testament to buying great companies at reasonable prices – regardless of share price trends or near term expectations – and holding for the long term.
If we keep his advice in mind – and our emotions in check – we may not challenge Buffett's position on the Forbes rich list, but we will be very well placed to achieve long-term investing success.
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