What would Warren Buffett do?

One hundred eleven billion, four hundred million dollars. $111.4B. $111,400,000,000. This is Warren Buffett’s approximate net worth as of May, 2022 according to Forbes. He is the 5th richest person on planet Earth, sometimes referred to as the “Oracle of Omaha” in recognition of his exemplary success as an investor. Had you invested $10,000 thirty years ago in S&P 500 stocks your account would have grown to be worth $210,791 today. In contrast a $10,000 investment into Buffett’s holding company, Berkshire Hathaway (BRK.A) would now be worth $652,264.

When asked what guiding principles have contributed to his success, Buffet often credits his mentor, Benjamin Graham who emphasized that investment results are more dependent on how an investor behaves than on how markets behave. Below is an excerpt from Grahams’ book, The Intelligent Investor which was first published in 1949.

But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus, the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons mistakes of judgment.

A useful summation of Graham’s, and Buffett’s strategy might be, “Expect volatility, and profit from it.” But, how exactly does that work? As Graham’s quote indicates, an intelligent investor does not change his plan because the market values a security differently than the investor. There are many reasons why this could be the case. The key takeaway is that the investor is only interested in what “suits his book”, and not the current price quote. Therefore, the first way to profit from volatility is to ignore it.

But, there is a second way to profit from volatility, which is to buy a security that suits your book when others don’t like it. For example, as I write this the S&P 500 index of stocks has lost 18.3% of its value since January 1st. A reasonable assumption is that at some point those stocks will regain the value lost and move to even higher values. We’ve seen this happen before. Many times. So, if you had a choice of buying at the January 1st price or today’s price which would give you the best return? Buying at today’s price would increase your return.

So, when will stock prices start moving up again? Historic low inflation and interest rates, then a global pandemic, quantitative easing followed by quantitative tightening and rising inflation and interest rates, households and businesses flush with cash and savings followed by the great resignation, a major war in Europe, these are some of the conditions that have existed and/or continue to exist today which have caused investors to sell their stock positions in anticipation of weaker corporate earnings. Of these many factors it is likely that inflation concerns are having the greatest effect on stock prices. Therefore, when investors become convinced that inflation has been tamed they may re-invest in those stock positions that have been abandoned. Price recoveries could happen quickly. The seasonally adjusted Consumer Price Index for All Urban Consumers increased just 0.3% in April after rising 1.2% in March. I hope this is indicative of a trend.

Questions about digital currencies? The Federal Reserve Bank of St. Louis recently published an informative piece entitled The Blockchain Revolution: Decoding Digital Currencies which provides some good, dependable information without hype or bias.

Thanks for reading.

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