Since the Berkshire Hathaway annual shareholder meeting in May, the investment world has been kicking around the idea that legendary investor Warren Buffett has somehow lost his touch.
The argument has been that Buffett should have been buying stocks when the stock market was panicking in March, following his own adage to “be greedy when others are fearful.” Instead, Buffett sold stocks — getting completely out of airlines — but mostly held onto his $137 billion in cash as Berkshire suffered through a $50 billion first-quarter loss.
Critics suggested that Buffett, now nearly 90 (his longtime partner Charles Munger is 96), was slowing down and can’t put so much cash to work quickly, that his value-oriented style has been lagging the broad market for years and that sluggishness has finally caught up with him.
Buffett has been counted out before, and has always bounced back.
It would be unwise to bet against him.
But the wager most investors should be taking on Buffett now doesn’t involve investing with Berkshire Hathaway, it involves his take on how to invest.
Buffett has always said that he buys “on the assumption that they could close the market the next day and not reopen it for five years,” and has famously doubled down on that time frame by suggesting that investors should “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Love or hate Buffett’s recent performance, his timeless advice is spot on right now. Using it to inform your financial decisions now could make it a lot easier to ride through whatever the market dishes out over the next few years.
That said, it might also represent a change in what you have been doing with your portfolio, even if you have been mostly a buy-and-hold investor dedicated to a standard asset allocation.
Consider, for example, the risk in bonds and fixed income investments, where interest rates have gone so low that investors are barely paid any premium for locking up money for five or 10 years.
In the most simple terms, if your cash holdings are getting a better rate of return in an online savings account than in a five-year certificate of deposit – which is precisely what depositaccounts.com says is the case right now – you don’t want to lock into that long CD rate (worse yet, five years down the line, it might roll over into something even worse).
The same could be said for a lot of bonds, where it’s not just the yield curve that is alarming but the potential for higher default rates going forward. The global response to the coronavirus pandemic has left some corporations and municipalities gasping for revenue streams that have been dammed up by shelter-at-home efforts.
The next decade could see some rocky times in that asset class.
Investors typically want mutual funds and exchange-traded funds (ETFs) when it comes to fixed income – rather than holding the paper themselves – because it diversifies away some of the risk [and because individuals who may feel like they know stocks well enough to pick a portfolio may have no self-confidence about their ability to select a bond].
That said, bond funds and ETFs could see heightened volatility as the market and the economy come together in the new normal, and investors who can’t ride it out to their long-term goals – who can’t act like the market has been shut down for a few years – could be in for rude surprises.
And those are the parts of the market that most people consider safest.
The stock market has been better in the face of the virus economy than anyone could have forecast. There is plenty of reason for optimism as the business world starts getting back to speed; the market is likely to respond positively, even though everyone knows that growth numbers only will look good because they’re being compared to stoppage time.
Eventually, however, experts will want to see real improvement, legitimately good numbers.
If those prove elusive, things could get rough. Again.
Yes, it’s like a temporary condition. So is virtually every downturn or bear market, but given the damage done to the economy, this “temporary” could last a lot longer than most.
Moreover, the pandemic market has made heroes of many work-at-home stocks, some of which will be long-lasting hero stories and others of which are riding a demand wave that will come crashing to the shore if/when the current bid demand surge dries up.
Before diving in on those hot stocks, revisit Buffett’s advice about buying things you’d want to own if you couldn’t trade them for a while. It will make today’s hot ideas feel lukewarm.
Moreover, at the Berkshire Hathaway annual shareholder meeting, Buffett noted that while he is betting on America, “anything can happen in terms of markets.”
While that statement could be true regardless of market conditions – it’s the stock market, and almost anything truly is possible, even if outrageous outcomes are unlikely – most people would say that it feels particularly fitting now.
Again, the old saws of investing work best; maintain a diversified strategy as you see the recovery unfold.
Throughout the long bull market, almost anything investors did turned out well; it’s important not to confuse the good fortune of a bull market with the brilliance needed to make money in all market conditions, especially in current times that don’t seem to closely reflect any past time period to help set expectations.
Investors always want to know what they own and why they own it, the job it has in a portfolio – and to then be realistic in their outlook – but it has never been more important than now.
Sound investment strategies and ideas never go out of style. Whether Buffett personally has enough time to recapture his glory, the safest bet in investing is that people will still be taking his advice a century from now, and profiting from it.