In September 2011, Warren Buffett’s company, Berkshire Hathaway, announced a plan to buy back its own shares.
I remember sitting there thinking to myself, “Well, if the best investor in the world thinks his shares are worth buying … who am I to argue?”
But it gets better, because at that time our dollar was trading at record highs — one Yankee dollar for one Aussie dollar.
So, I took a deep breath and bought as many Berkshire Hathaway shares as I could afford. And, less than seven years later, I had quadrupled my money.
That very profitable experience taught me that when the wealthiest investor on the planet speaks, you stop what you’re doing and you listen.
Well, last week Buffett released his annual shareholder letter, and there’s one lesson in there that we all need to take note of …
At the start of the letter each year Buffett usually prints his very impressive track record:
Over the past 53 years Berkshire Hathaway shares have increased by a cumulative 2,404,748 per cent.
Yet this year Buffett did something a bit unexpected. He decided to highlight in a table the times that Berkshire’s share price totally tanked:
In the 70s his shares fell by 59 per cent.
In the 80s his shares fell by 37 per cent.
In the 90s his shares fell by 50 per cent.
And in the recent GFC (2008) his shares fell by 50 per cent.
“This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period”, Buffett wrote.
Right now in the US, ‘margin loans’ (loans taken out to buy stocks) are at all-time highs. Much higher than at the peak of the GFC. And that’s before you factor in the widespread use of home equity lines of credit to buy stocks (people borrowing against the equity in their home loans), or risky funds that have inbuilt leverage (which multiplies your gains … or your losses).
Buffett, who is famously ‘greedy when others are fearful’, has built up the most amount of cash he has ever had sitting on the sidelines — ever.
Join the dots.
The most successful investor in history is telling us that low interest rates and too much debt have pushed the prices of stocks too high. He’s been in business for 53 years and seen it all. So what’s his prediction?
“In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.”
Tread Your Own Path!