When the going gets tough, the tough get buying.
At least, that seems to be the path taken by the world's most successful investor, billionaire Warren Buffett.
Buffett has an enviable track record – since 1965, he's compounded the per-share book value of his company, Berkshire Hathaway (NYSE: BRK-B) at an annual rate in excess of 20%. If that sounds impressive, it should – the US Standard & Poors 500 index grew at an average rate of 9.4% per year over the same time period.
Excellence, compounded
Berkshire's growth equates to a cumulative gain of 490,000%. No, that's not a misprint, and I haven't misplaced a decimal point.
Now I have your attention, and have given you ample evidence of why Buffett's example should be heeded, I want to turn to more recent times.
As recently as 2008, Buffett was exhorting investors to buy shares. In October of that year, Buffett penned a New York Times op-ed piece titled 'Buy American, I Am'. His thesis, put simply, was that 'over the long term, the stock market news will be good'. Moreover 'bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.'
Buffett's view, put three years ago, was that prices of quality stocks were cheap enough that he intended his entire net-worth (excluding his stake in Berkshire Hathaway) would soon after be in equities. That's as 'all-in' a best as you can make – and I think it applies as much to Australian equities as it does to US stocks.
Times change, principles don't
I don't need to tell you that it's been a bumpy ride in the three years since that article was written. We've had a downgrade of the United States' credit rating, the 11th hour increase of its debt ceiling, a partial bailout of Greece and now concerns about Italy.
Despite all of that, Buffett's approach, characteristically, hasn't changed.
The man who gets 'greedy when others are fearful' has been plenty greedy in the last 36 months. Most notably, he spent $26 billion buying the 77% stake in a major US railroad (Burlington Northern Santa Fe) that he didn't already own, and another $9 billion buying a chemical products business, Lubrizol.
In fact, the markets got so fearful recently – and its shares so cheap – that Berkshire even started to buy back its own stock.
Purchases ramping up
Warren Buffett is getting greedier. In the last three consecutive quarters, Buffett purchased US$834 million of equities in the first, US$3.61 billion in quarter two, and a huge US$7 billion in the most recently completed quarter.
We won't know specifically what Buffett has been buying most recently until early next week – and he's been given regulatory dispensation in the past to keep some of his purchases secret to prevent 'copycat' buying that will otherwise drive up the share price of his targets.
We do know that Buffett told an interviewer that he had done more buying on August 8th than on any other day this year.
Buy well and hold on
Warren Buffett is unashamedly long term in his outlook. In the op-ed piece mentioned above, he was very clear that he has no idea what the stock market will do in the short term – but that over the long term, he believes equities are the place to be invested.
Buffett isn't promising a get-rich-quick scheme, or looking for a short term trade. Instead, he's steadfastly looking through the gloomy mood of the market to an economic future he knows will be better than today. In addition, he's buying businesses that are of inherently superior quality, and trading at bargain prices.
Seems too easy, really – except that it's both true and incredibly profitable. Buffett has a 45-year track record to prove it. Very occasionally, you'll hear a critic suggest that he's lost his touch, or that it's somehow different this time.
That might be true, except that he's navigated wars, recessions, oil spikes, share market crashes and tech booms. More than once he's been accused of being outdated and using an investing style that doesn't suit the times. Every time, he's proved the doubters wrong.
Foolish take-away
It might not be exciting, and it's not for the impatient, but Buffett's very simple method is devastatingly effective.
Being calm enough to invest when the headlines are foretelling doom and the markets are volatile requires both willpower and confidence in your strategy. Warren Buffett has given us 490,000 reasons to be confident – the rest is up to us.
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Scott owns shares in Berkshire Hathaway, but wishes he'd bought them 45 years ago. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
