“Predictions are
tough, especially about the future.” Yogi Berra
On April 22, I took to these
pages to reassure people about their investments after a big drop in Dow Jones
Industrial Average (DJIA) that day left the index at 33,811. Today, the DJIA closed
at 33,761. The obvious conclusion from this is that the index has not done much
in the last 3 ½ months. If you have followed the markets, you know they have
been anything but calm and stagnant. The
DJIA proceeded to go from 33,811 to below 30,000 and now has rallied back up to
its current level, all in 3 ½ months! Normally, the stock market is calmer than
this.
Which brings me to my question in
all this: What does a long-term investor do in such volatile times? When I
think of a long-term investor, I think of Warren Buffett and his company,
Berkshire Hathaway. Berkshire Hathaway owns large holdings of various stocks. Berkshire’s
well-known holdings include Apple, Coca-Cola, Bank of America and American
Express. Some of these holdings have been in the company’s portfolio for
approximately 30 years. Mr. Buffett will tell you that when he buys a stock,
his preferred holding period is forever. Berkshire’s notable recent purchases
include stakes in Occidental Petroleum and Chevron. The company is required to
file a Form 13-F every quarter with the Securities and Exchange Commission
(SEC). The 13-F’s are widely anticipated, followed and analyzed. What we saw
from Berkshire during the first half of the year while the market was dropping
was a firm that was doing plenty of buying and not any selling.
That is one of the lessons here.
The big drop in the indexes offered up a chance to buy some high-quality companies
at reasonable prices. A sharp investor will take advantage of such
opportunities. Otherwise, it is just noise to the long-term investor. But it is
the noise that gets investors into trouble. Their emotions will guide them to
buy stocks when prices are high and sell when prices are low. This is the exact
opposite of what smart investors like Mr. Buffett do. Mr. Buffett will tell you
to be greedy when others are fearful and fearful when others are greedy. Most
will be greedy when prices are high, and fearful when prices are low. While
others rush to sell, he picks through the pile to find those gems that are
cheap. When you are presented with that type of market scenario, one that
offers you the chance to buy a great company for a reasonable price, you take
it. These are the types of situations that could yield a return of 5x-10x-15x
your money over time.
Unfortunately, those types of
opportunities are not so obvious at the time. They do require an observant eye,
nerves of steel and a faith that knows these great companies will bounce back. This
is not for most people. However, many people invest regularly through a 401(k)
or some kind of investment program. The long-term investor stays the course through
the drops. If you have stayed the course through the market drop this past
spring, you would have seen your investment rally to the point where it had
regained all its lost value. A short-term price chart of stock prices can be
all over the map. After all, what has the market done in the last 3 ½ months,
right? But the long-term price chart only goes one way-up. I cannot predict
future stock prices. As Yogi Berra told us, predictions are tough, especially
when they are about the future. He also told us that the future is not what it used
to be. Future stock prices are not guaranteed to go up, but I am willing to bet
that they do.
