April 2015 Monthly Insight: Takeaways from Warren Buffett’s Stellar 50-Year Track Record

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Apr 15, 2015


What comes to mind when you hear the name Warren Buffett – investor, mutual fund manager, CEO, entrepreneur, stock picker, philanthropist, or billionaire? Or maybe something else comes to mind? Whatever you think, one thing is clear: he has made a lot of money investing over the years.  If you’re counting, Forbes’ 2015 ranking places his net worth at $72.7 billion, which makes him the third wealthiest person in the world behind Mexican telecom king Carlos Helu ($77.1 billion), and Bill Gates ($79.2 billion).

Buffett’s success over the last 50 years undoubtedly enhances his credibility, and when we think of Warren Buffett, “patience” and “value investor” are among our first thoughts.  “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Buffett once remarked.

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he has advised. That compliments another one of his quips, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

He sure seems to have mastered the art of patience, eschewing worries about the daily twists and turns in the market in favor of the long term.  His “forever” philosophy is a guideline that beckons us to be patient investors, keeping our eyes on the long-term prize.

In some respects, his accumulated comments might add up to something akin to a Book of Proverbs for investing. There generally aren’t hard and fast rules that apply to every situation, but a focus on the fundamentals has typically proven to be among the wiser paths one can take.  Even with severe bear markets in the mid-1970s, 2000-02, and 2008-09, stocks have still registered strong returns over the longer term as the S&P 500’s performance demonstrates.

We can’t say for sure where the market will be in 12 months—who really can?—but an investment in a broad-based portfolio is akin to grabbing a stake in the U.S. economy.  While we’ll see setbacks from time to time, the economy continues to plow forward, supporting corporate earnings and rewarding investors who practice patience.

Inflation, the Fed, and low rates

While we never want to miss the forest for the trees, we believe it is important to keep tabs on the crosswinds that influence shorter-term market action.  One topic that has been influencing markets right now has been the unusually low rate of inflation. That’s right, low inflation.

Just the mention of inflation, especially “unusually low inflation,” and we’ve probably conjured up all kinds of worrisome thoughts. But please bear with us and don’t hit the delete button.

While we are all aware of the steep drop in gasoline prices, other items seem to be rising in price.  Your favorite restaurant may have just hiked prices, or the cost of a movie ticket, popcorn, and a drink may leave you gasping for breath. Has the price of your health insurance jumped? Or maybe the check you just wrote for your son or daughter’s college tuition comes to mind when you hear someone utter “unusually low inflation.”

Well, according to the broad-based Personal Consumption Price Index, which is the index the Federal Reserve favors when it’s gauging price pressures in the economy, price increases have been holding below its 2% annual target for 34 months straight, per data supplied by the St. Louis Federal Reserve.

If we throw out the more volatile food and energy components and look at what economists call core inflation, inflation is still below the Fed’s 2% target for the same 34 months.

The Consumer Price Index is more familiar to most folks, especially to those who remember the wicked inflation of the 1970s. The CPI tends to run slightly higher than the PCE Price Index, but it is also currently running below the Fed’s target of 2% (BLS).

So what’s the point? Well, whatever you think the real rate of inflation is–and of course it will vary from person to person based on the individual basket of items and services he or she consumes–how the CPI or the PCE Price Index records inflation directly affects stocks, bonds, and Federal Reserve policy.  Therefore, these are the relevant measures of inflation for an investment viewpoint.

The Federal Reserve was quite explicit in its statement that followed the March meeting when it noted it won’t begin raising the fed fund rate until it sees further progress in the job market and “is reasonably confident that inflation will move back to its 2% objective over the medium term.”

Clearly, low inflation is playing into the Fed’s low-rate equation. Plus, long-term bondholders want to be compensated if they expect much higher inflation. Right now, that’s not the case.

While the Fed’s take on inflation and raising rates is vague, the Fed doesn’t need to see 2% inflation; it just has to be “reasonably confident” that inflation is moving toward its target.  In some respects, it reminds me of the 1960s Supreme Court decision on the definition of obscenity. Fed Chief Janet Yellen seems to be implying she will know inflation is rising when she sees it.

We hope you’ve found this review to be educational and helpful.  Let me emphasize, it is our job to assist you! If you have any questions or would like to discuss any matters, please feel free to give us a call.

As always, we are honored and humbled that you have given us the opportunity to serve as your financial advisor.