Lessons Learned from Warren Buffett

Saturday, September 1st

Last week we officially set the record for the longest recorded bull market in history.  That means that for 3,453 days, nearly nine and a half years, the S&P 500 hasn’t suffered a fall or decline of 20% or more.

There seems to be mixed reactions to this historical moment.  Some seem to feel that a correction is inevitable and looming, while others are afraid of missing out and just want to get in on the action.  In our office, we’ve definitely seen more of the latter, with more and more people thinking about taking a more aggressive approach investing their retirement money.

I recently read the biography of Warren Buffett.  In the book he talks about investing during the dot-com era.

There was a period of time in the 1990’s when the stock market was on another growth trajectory.  Up until last Tuesday it was the longest bull market ever experienced.  The latter half of this 90’s bull market was driven by the dot-com boom.

You might already know that Warren Buffett has a philosophy to only invest in things he understands and companies that he feels are valued correctly.  He made a decision to avoid investing in the dot-com companies because much of the hype around these stocks was related to their “potential” instead of what the company had already produced.  To make matters worse, while Buffet sat on the sidelines of the dot-com craze, his fund, Berkshire Hathaway, actually lost 50% of its value.

During this 4-5 year period, there were lots of articles written about Buffett, questioning whether he knew what he was doing or whether he was just an old guy that didn’t understand the markets anymore and whether his philosophy was too outdated to be successful.

For four or five years that went on.

In his biography, Buffett says that even he started to question his strategy a little bit and thought perhaps he might be making the wrong decision, as some of his loyal, long-time investors that had always believed in his investment strategies, started to bail on him.

But Buffett stuck to his guns.

Warren Buffett doesn’t give many market predictions, but in 1999 he attended a conference and got up and talked about the bull market.  He admitted that while he didn’t understand the dot-com rise, he did understand that that these companies didn’t have the book value or the financials to justify where they were being priced at.  Because of that he predicted a serious correction.

Within a year and a half, that’s exactly what happened.

When the dust settled after the dot-com crash and everything was evaluated, Berkshire Hathaway stock had not only climbed back to where it was, but it had doubled in price while the dot-com investors lost everything.  By the time 2003-2004 rolled around, those people who stuck with Buffett and his philosophy, had doubled their money, while all the people who chased the boom were back to where they started.

What was the difference?  Buffett stuck to his plan, while others, driven by greed and the fear of missing out, got caught in the correction.

It is no different today.  We are in a market that just broke that very bull market record spurred on by the dot-com boom.  This unchartered market activity is intoxicating and compelling and has some people wondering if it’s time to drop their more conservative retirement plan in favor of a more aggressive and risky growth strategy.

But, as always, regardless of market conditions, the best thing you can do for your retirement money is stick to your strategy.

As human beings, we follow the crowds, we like to follow the trends.  But the average investor is late to the table and slow to get out.  And too many of us have risk amnesia.

Every one of us is 10 years older than we were in 2008.  Every one of us is 10 years closer to retirement.  Some clients, who want to take a more aggressive approach, like to point out that they’ve recovered just fine from the 2008 downturn.

While this is true, I remind them that they are now 10 years closer to retiring and in many cases, they no longer have the time to wait another ten years in the case of a serious correction.  It’s critical to put things in perspective and evaluate where you are now in your retirement journey in order to make the right investment decisions.

Stick with your strategies.  Now is not the time to change your portfolio from moderately conservative to aggressive, just because the market’s up today or your neighbor is “making a killing.”

None of us will probably ever be as rich as Warren Buffett, but we can take a page from his book and commit to trusting our own carefully planned retirement approach and then be confident that we are making the right call in any market—bull, bear, or anything in between.

Matt Deaton