Throughout history, people associated with the stock market loved predicting doom and gloom. They still do. Disaster lurks around every corner and, most important, is easy to sell. Read a selection of predictions from the beginning of the printed word until today, and you’ll be amazed that anyone is alive, much less prospering! Take a look at some of these actual forecasts, predictions, and headlines about the stock market from the past:
Don’t fall for it when they tell you–buy now! Prices are going higher! Because prices are heading for one of the worst plunges you’ve ever seen.
(1951, Dow Jones Industrial Average: 262)
Will this major shake-up in America’s wealth wipe out your savings and cripple your future?
(1954, Dow Jones Industrial Average: 330)
USSR launches Sputnik 1, US dominance in doubt, Dow off almost 10% in under a month.
(1957, Dow Jones Industrial Average: 419)
Cuban missile crisis jams indexes sharply lower.
(1962, Dow Jones Industrial Average: 590)
Increased Vietnam bombings and talk of high taxes rout markets.
(1966, Dow Jones Industrial Average: 785)
Nixon resignation, runaway inflation, and the crisis of confidence in the economy
forever change the market.
(1974, Dow Jones Industrial Average: 616)
Joe Granville’s “abandon all hope” message sparks a giant sell-off on record
(1981, Dow Jones Industrial Average: 875)
Is it 1929 all over again? Huge bear market feared.
(1987, Dow Jones
Industrial Average: 1,805)
Our expectation is that we are facing a long bear market, perhaps as long as five
years, and that a great part of the advance of the past 15 years will be retraced
in that time.
(1990, Dow Jones Industrial Average: 2,670)
Is this the end? Three savvy pros look at the bear that’s begun.
Jones Industrial Average: 3,762)
Professor’s sophisticated computer model forecasts 40 % decline for equities.
(1996, Dow Jones Industrial Average: 5,354)
If you’re not prepared for the bear, you risk getting mauled.
(1997, Dow Jones Industrial Average: 6,703)
Market forecast looks grim.
(2003, Dow Jones Industrial average 8850)
I’ll bet that, at the time they ran, these headlines and predictions had the desired effect and scared the bejesus out of people. The best way for you to short-circuit the panic you will inevitably feel over the course of your investment program is to focus on all the other panics and their aftermath. Remember that not even the great crash and depression of the 1930s would have destroyed a long-term investor who stuck with a superior investment strategy. (From How to Retire Rich by James O’Shaughnessy.)
The Day Warren Buffett Lost $342 Million
Hey, seen any positive headlines lately? It’s human nature to feel nervous at times like these. You’re not alone. The ONLY way to persevere through short-term volatility is to take the long-term view. I repeat, take the long-term view. Study and look at history. Look at five- and ten-year numbers; examine markets over longer periods; and remember, we’ve been through this before.
Think back to the crash of 1987. Warren Buffett, one of the richest men on the planet, owned a company called Berkshire Hathaway Inc. On Friday, October 16, 1987, his company was worth $3,890 per share. On the close of business on Monday, October 19, 1987, Berkshire was worth $3,180 per share. That day he lost $342 million worth of the value of his company, except that he really didn’t lose it. How, you ask? Well, he never sold it. He waited patiently, and he more than recovered the loss. Today his company trades at more than $64,000 US dollars for one share (symbol BRK).
The lesson here is that the rich have been here before. If you want to find a recipe for success, Mr. Buffett is one of the best examples that you will find. I’m sure Mr. Buffett felt nervous and anxious back then; however, he was lucky. He didn’t have the constant media, news, internet ticker, stock channel, etc., reminding him every second of the state of the markets. The media has us so wired into watching weekly, daily, hourly–these fiashing green and red arrows. To give them credit, it sells; and just like coffee we are so hooked on it that we feel we need our daily dose. Admit it, it’s ridiculous.
So what are you going to do about it? I understand the nervousness and concern, that’s human nature. The way to persevere through short-term volatility is to create a game plan. Imagine the Vancouver Canucks going into the playoffs without a game plan. Create one for your time horizon. If it is five years, then focus five years ahead, not day to day.
I share Mr. Buffett’s philosophy because it is one of the best examples of a disciplined investment philosophy called value investing. Mr. Buffett is also well documented through books, publications, and daily media coverage. He is known as the sage of Omaha–a man who does not own a computer, who does not invest in any technology stocks, and who has built his entire fortune through the stock market. He is good friends with Bill Gates of Microsoft but has never invested in Microsoft because he says he doesn’t understand it. His company, Berkshire Hathaway, has compounded more than 20% since starting in 1969.
A few of his investment comments or insights can be considered rules for the value investor. Some of my favorites are:
Never invest in a business you cannot understand.
Buy companies with strong histories of profitability and with a dominant business franchise.
Be fearful when others are greedy and be greedy when others are fearful.
Much success can be attributed to inactivity–most investors cannot resist the temptation to constantly buy and sell. Lethargy bordering on sloth should remain the cornerstone of an investment style.
An investor should act as though he had a lifetime decision card with just twenty punches on it.
“Turnarounds” seldom turn.
Do not take yearly results seriously; focus instead on four- or five-year averages.
Look for companies with high profit margins.
Growth and value investing are joined at the hip.
Buy a business; don’t rent stocks.
Wide diversification is only required when investors do not understand what they are doing.
Focus on return on equity, not earnings per share.
The critical investment factor is determining the intrinsic value of a business and
paying a fair or bargain price.
It is optimism that is the enemy of the rational buyer.
Invest for the long term.
If you wish to learn more about Warren Buffet’s incredible track record and how he applies his philosophy, check out www.berkshirehathaway.com or visit your local bookstore or library for several books written about him that I’m sure you will enjoy. Mr. Buffett concocted a great recipe for investing success.