Published: October 16, 2008
THE financial world is a mess, both in the United States and abroad. Its problems, moreover,
have been leaking into the general economy, and the leaks are now turning into a gusher. In
the near term, unemployment will rise, business activity will falter and headlines will
continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in
which I previously owned nothing but United States government bonds. (This description
leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If
prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in
United States equities.
Why?
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.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I
haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year —from now. What is likely, however, is that the market will move higher, perhaps substantially
so, well before either sentiment or the economy turns up. So if you wait for the robins, spring
will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932.
Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in
March 1933. By that time, the market had already advanced 30 percent. Or think back to the
early days of World War II, when things were going badly for the United States in Europe
and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned.
Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy
was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of
America’s future at a marked-down price.
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.
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.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted
for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in
value. Indeed, the policies that government will follow in its efforts to alleviate the current
crisis will probably prove inflationary and therefore accelerate declines in the real value of
cash accounts.
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.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the
market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened
in an empty bank building and then advertised: “Put your mouth where your money was.”
Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding
company.
