Warren Buffett is the most successful, as well as the most famous, investor of the modern era.
So what does he make of the recent turmoil on global stock markets? More importantly, what are his thoughts on the economic situation?
Chancellor Rishi Sunak warned yesterday that we’re entering a “severe recession the likes of which we have never seen”. What impact will that have on the markets?
Warren Buffett recently spoke at a virtual meeting for shareholders in his firm, Berkshire Hathaway. He talked about stocks, the economy and of course the coronavirus crisis.
Buffett’s optimism is legendary. On this occasion, though, his overriding message was the need for caution and realism.
Particularly noticeable was how often Buffett repeated the words, “I don’t know”. That’s right, Warren Buffett, the most successful investor of the modern era, doesn’t know how this crisis will unfold.
Warnings for investors
To investors expecting the economy to bounce back quickly, Buffett offered three warnings.
1. The current situation is unparalleled
“In 2008 and 2009 our economic train went off the tracks. This time we just pulled the train of the tracks and put it on a siding. And I don't really know of any parallel — in terms of a very, very well the most important country in the world, most productive, huge population — in effect sidelining its economy and its workforce.”
2. Nobody knows how the crisis will play out
“We're not getting a best case and we know we're not getting a worst case. The range of possibilities is still extraordinarily wide. We do not know what exactly happens when you shut down a substantial portion of your society.”
3. Anything can happen in the markets
“I don't believe anyone knows what the market is going to do tomorrow, next week, next month, next year. I know America's going to move forward over time, but I don't know for sure. Anything can happen in terms of markets. You're going to have to be careful about how you bet.”
The good news
But there was good news from Buffett as well. He doesn’t know when the world’s biggest economy will recover but he’s sure it will recover.
“I remain convinced,” he said. “I was convinced of this in World War II, I was convinced of it during the Cuban Missile Crisis, 9/11, the financial crisis — that nothing can basically stop America.”
Buffett’s advice
As usual, Buffett had plenty of advice for ordinary investors. These were the key takeaways.
Avoid active funds and index instead
“For most people,” Buffett said, “the best thing to do is owning the S&P 500 index fund.
“One side has high fees and they think they can pick out stocks and the other side has low fees. I know which side is going to win over time.
“I can tell you I haven’t changed my will and it directs that my widow would have 90% of the funds in index funds. I think it’s better advice than people are generally getting from people that are paid a lot to give advice.”
Patient indexers have been richly rewarded
“All you had to do was believe in America. You just had to believe that the American miracle that was intact. You didn't have to read the Wall Street Journal. You didn't have to look at the price of your stock. You didn't have to pay a lot of money in fees to anybody. In the end the answer is never bet against America.”
Even Buffett Berkshire will struggle to beat the S&P 500
“Berkshire is about as sound as any single investment can be in terms of earning reasonable returns over time, but I would not want to bet my life on whether we beat the S&P 500 over the next ten years."
Fund managers will always pick duds as well as winners
“We don’t think that if you own a great many businesses that every one is destined for success. That’s why I suggest to people, buy an index fund. I would not want to put all my money in any one company. You get surprises in this world, and there will be businesses that we think are very good that'll turn out not to be not so good an there’ll be other businesses that turn out better than we think."
Avoid sales-driven financial advisers
“You’re dealing with an industry where it pays to be a great salesperson. There’s a lot more money in selling than in actually managing, if you look into the essence of investment management.”
Finally.. Don’t borrow money to invest
“When something like the current pandemic happens, it's hard to factor that in. That's why you never want to use borrowed money (to invest). There’s no reason to use borrowed money to participate in the great American tailwind.”
These are anxious times for everyone. As Warren Buffett says, no one knows where markets are heading in the short term, and investors need to be prepared for more market falls. If you’re concerned about the potential impact on your portfolio or your plans for retirement, why not get in touch? We are here to help you.
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