As we enter the second quarter of 2013, I’m writing to summarize market developments since the start of the year. Also I will share some thoughts from Warren Buffet, America’s most famous investor, regarding where he sees stocks heading.
At the end of March, US stock markets crossed the all-time high reached in October of 2007. This was due to an exceptionally strong performance to start the year following the agreement by U.S. Congress in early January to avoid the “fiscal cliff” which would have required dramatic reductions in spending and risked throwing the U.S back into recession.
Warren Buffet’s view: Stocks still offer value.
Mr. Buffet is arguably and often considered the greatest investor of all time. From 1966, when he began running Berkshire Hathaway, to the end of 2012, the overall US stock market has returned an average of 9.4% annually. That means that $1,000 invested in the US market in 1966 was worth just over $74,000 at the end of 2012. During that same time, the value of Berkshire Hathaway increased by almost 20% per year, twice the US market return. The result: that same $1,000 invested in Berkshire Hathaway would have grown to over $5 million.
Each year Warren Buffet writes an annual letter to his investors. In this year’s letter there were three key messages.
- Invest in “wonderful” businesses – Buffet is known for saying that he’d rather buy “a wonderful business at a fair price than a fair business at a wonderful price.” He touched on Berkshire Hathaway’s investment in American Express (he owns 14% of it), Coca-Cola, IBM, and Wells Fargo (each of which he owns between 6-9%).
- Look past today’s uncertainty – He addressed the uncertainty that preoccupies many members of the media and has dampened the willingness of American business to invest. He points out that uncertainty has been a constant in the United States since 1776. Buffet continues to express confidence in the resiliency of American in a public letter titled “Buy American, I AM“, which appeared in The New York Times close to stock market bottoms during the uncertainty in the aftermath of the global financial crisis
- Stay in the game – In this year’s letter Buffet addressed the temptation to, in his words, “try to dance in and out (of the stock market) based upon the turn of tarot cards, the prediction of so-called experts or the ebb and flow of business activity.” He went on to say that since the long-term outcome of investing in stocks is so overwhelmingly favorable, “the risks of being out of the game are huge compared to the risks of being in it.”