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Warren Buffett’s valuable lesson from the GFC begins to pay off

Berkshire Hathaway (NYSE: BRK.A, BRK.B), the company of CEO Warren Buffett, announced its third-quarter results with earnings of US$5.05 billion, up 29% from the same period last year. Interestingly, within those earnings was $1.2 billion in returns from the company’s investment into General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS) during the GFC when both companies were in need of capital.

Mars and Wrigley recently repaid $5.08 billion in loans — plus interest — for Buffett’s assistance in Mars’ takeover of Wrigley in 2008 for $28 billion. Mars, known for its M&Ms candies, became the world’s largest confectionery company at the time of the takeover.

Separate from the quarterly report, one of his other GFC business deals with Bank of America (NYSE: BAC) has already turned into a paper profit of nearly $5 billion from the bank’s share price rising 96% since August 2011 when he invested $5 billion in the bank.

All the zeros behind the numbers may make it seem that there is no similarity with Buffett and your own investing, but he follows the same rules that you should. In October 2008, he wrote an article in The New York Times called “Buy American. I am”, in which he wrote why he was buying equities in the depth of the GFC: “A simple dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

He went on to write that he couldn’t predict the short-term movements of the stock market, but he noted that it is likely that the stock market will move higher before the economy and market sentiment does. By that time, you will have missed your chance for heavy mispricing of good companies.

Good companies like Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), which play such a major role in retailing in Australia, will probably continue to grow in size and earnings. The mining industry is down now, and BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have been pared back in share price, but a similar cyclical downturn occurred in the mining bust of the mid- 1970s only to turn around later in the same decade.

Foolish takeaway

We don’t have to hold onto the same shares forever, but we have to be investors over the long haul. In October 1980, the S&P ASX All Ordinaries Index (ASX: XAO) was about 660, and now it is 5400. It has had ups and downs, but it recovered each time, and soared higher. Investing in companies that have the staying power to last decades is one of the prerequisites for long-term returns, and when the market has fire sales, be ready to be greedy.

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