You think you've had a bad year? Poor Warren Buffett saw more than $16 billion evaporate from his net worth as Berkshire Hathaway followed the market's swoon.
Adding insult to injury, he's been criticized for the awful performance of recent investments in Goldman Sachs and General Electric. In addition to preferred shares that pay 10% dividends, he got warrants for common shares at what seemed like great prices -- prices that are waaayy higher than where the stocks are currently trading.
In response to the market panic, Buffett penned an op-ed in The New York Times last fall saying he was buying U.S. stocks for his personal portfolio. Since then, markets have done absolutely nothing good and the economy has fallen off a cliff.
This raises the question: Has the Oracle of Omaha lost his touch?
Seriously?
Simon Maierhofer thinks so. In fact, he took issue with Buffett's claim that stocks will outperform cash in the coming years:
How did [Buffett's] "cash is trash" philosophy fare over the past 10 years? $10,000 invested in the S&P 500 exactly 10 years ago would be worth $7,500 today. The safest cash equivalent, [Treasury bills] ... would have returned about 30%, putting you at $13,000. We don't encourage investing by looking in the rear view mirror but a look at the numbers shows that the only bull market right now is in cash.
Let's leave aside for a moment the question of inflation, which ensures that the $10,000 of 10 years ago is not, in fact, the equivalent of $10,000 today. What does the market's performance over the past 10 years suggest for the future?
Up, up, and away
Any 10-year retrospective has to contend with the fact that 1998 was smack in the middle of the dot-com boom, when tech companies like Hewlett-Packard (NYSE: HPQ) and IBM (NYSE: IBM) -- and even bland companies like General Motors (NYSE: GM) and AT&T -- traded like runaway growth was here for good. Since then we've seen not one, but two bubbles burst. The awfulness of our most recent trailing 10-year returns is hardly news. But if we look at 10-year returns for the Dow Jones Industrial Average over the past 100 years, a pattern emerges:
| 10-Year | Dow Jones Industrial |
|---|---|
| 1998-2008 | (9%) |
| 1988-1998 | 331% |
| 1978-1988 | 165% |
| 1968-1978 | (19%) |
| 1958-1968 | 77% |
| 1948-1958 | 226% |
| 1938-1948 | 14% |
| 1928-1938 | (49%) |
| 1918-1928 | 254% |
| 1908-1918 | 60% |
After booms come busts; after busts come booms. That's how markets work. If we had chosen a different frame (i.e., ending in 2006 instead of 2008), the numbers would likely be different, but the overall pattern would be the same.
This isn't a short-term, cherry-picked set of data, after all. It's 100 years of market returns, during which the nation overcame two world wars, four smaller wars, a flu epidemic, the Great Depression, civil uprisings, multiple recessions, oil shocks, and terrorist attacks -- not to mention sideburns, Chia Pets, Carrot Top, and boy bands.
Anything can happen in the short term -- and the short term right now is volatile and unpredictable, as it always is. Over the long term -- going back an entire century -- the trend of the stock market is pretty clear.
But the author doesn't just claim that the past 10 years have been rough for investors -- he claims that this proves investors should be in cash going forward. The problem is, that 30% return he cites in T-bills doesn't account for the 27% compound inflation over the past 10 years, which leaves cash roughly holding even -- and that's largely true across time periods. And if you hold cash as actual cash, well, inflation just keeps hacking away, leaving you with less than you started with.
It's time to be brave
Yes, stocks are volatile, especially now. Yes, there will be boom times and bust times -- and the busts are no fun, even when we're resigned to their presence. But if you want your money to earn you adequate post-inflation returns over the long haul, cash isn't going to get you there. Never has. Never will.
Not only that, but as fear, panic, and forced liquidation rules the market, companies with a history of proven long-term returns -- like Alcoa (NYSE: AA), Eli Lilly (NYSE: LLY), and Dow Chemical (NYSE: DOW) -- have recently touched their lowest prices in well over a decade. Anyone who thinks holding cash or buying Treasuries at historic highs in lieu of stocks at historic lows is making a mistake they'll almost certainly regret down the road.
None of this is to say we've reached a market bottom. Historical earnings multiples, for example, suggest that more pain could be in store for investors. Some periods of market lethargy have indeed lasted for longer than 10 years, too.
Nonetheless, the trend is as true today as it's been for the past century: We're at a point where bargain-hunting investors can be as assured as they've been in decades that stocks will perform well in the long term.
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