Berkshire Hathaway (NYSE: BRK-A, BRK-B) Chairman Warren Buffett recently spoke about the stock market's progress since November 20, 2008, when the Dow Jones Industrial Average (NYSE: DJI) closed below 8,000 during the GFC.
Ironically, the index just closed above 16,000, setting a new all-time record high. That makes it about 14% higher than the 14,000 high in 2007. Is this more than just a high? Is it a bubble already again?
According to Buffett, "I don't know what stocks will do next week or next month or next year. But five or ten years from now, I would say that they're likely to be higher." He said he doesn't concentrate on the short-term movements of the market.
He emphasised the point by saying that when his company buys stocks, he looks at them as owning parts of a business, like owning a farm or an apartment house. If people buy the right companies through stocks, and don't try to guess where the share price will be in a week or month, then you can do very well by holding for five or 10 years.
In November 1988, the Dow Jones was about 2,040, so since then, a rise to 16,000 over 25 years would give you a compounded annual growth rate (CAGR) of 8.59%. It doesn't sound like a fantastic amount, but it's the compounding that does the magic.
Consider that $1,000 invested over 25 years at the same growth rate would be $7,847.76 now. The S&P ASX All Ordinaries Index (ASX: XAO) rose from 1,482 to 5347 over the same time, for a CAGR of 5.27%. To be fair, it did hit a high of 6873 in November 2007, so during that 19-year period it rose on average 8.4% annually.
Foolish takeaway
We need to have this long-term perspective rather than only chase a quick dollar getting in and out of stocks. That is why Buffett concentrates on companies that have had steady, growing earnings over the past five and 10 years.
It doesn't automatically predict where a stock's price will be soon, yet the stability of growth allows him to get a good approximation of where it probably will be in the long-term. If you are a believer in Buffettology, then you are on the right track.
