The world’s financial system, including the global stock market, is crashing all around us. The talking heads on the business channels are telling us things are bad and will likely get worse. So, in the midst of all this chaos, what would the Oracle of Omaha do? Let’s ask him.
D4L: Mr. Buffett, what do you see happening in the near-term?
WB: In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
D4L: Mr. Buffett, what are you holding in your personal portfolio?
WB: I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway (BRK.A) holdings, which are all committed to philanthropy.)
D4L: You said “previously owned”. Has something changed?
WB: I’ve been buying American stocks.
D4L: Really!? There are a lot of scary things happening in the market. Why would you be out there buying?
WB: A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
D4L: Yeah, but the talking heads are telling us that things have never been this bad.
WB: 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.
D4L: Wow. So the stock market is a wonderful money making machine where you just can’t lose?
WB: You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
D4L: I guess for some they would be better off holding cash, right?
WB: Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
Obviously, Mr. Buffett was way too busy to take my call, probably picking the stocks he will buy in the morning, so I took his responses from this wonderful October 17, 2008 NY Time article titled “Buy American. I Am“. There is a lot of wisdom in Mr. Buffett’s words.