Buffett and the Markets

First, generalized fear is an investor's friend because it offers bargains. Second, personal fear is our enemy.

The annual letter to the shareholders of Berkshire Hathaway, written by Warren Buffet, was published last Saturday, February 25th.

Here's a short passage that fits perfectly with the current market moment:

“America's economic exploits resulted in staggering profits for shareholders. During the Century. XX, the Dow Jones rose from 66 to 11,497, a capital gain of 17,320.00% to which we must add ever increasing dividends. The trend continues: By the end of 2016, the index rose another 72% to 19,763.

It's almost certain that American businesses—and, consequently, a stock portfolio—will be worth much more in the years to come. Innovation, productivity gains, an entrepreneurial spirit, and an abundance of capital will take care of this. Ever-present pessimists can thrive by selling their grim forecasts. But God help them if they practice the foolishness they preach.

Many companies will obviously be left behind and some will go bankrupt. This jewel is the product of the dynamism of the market. The coming years will occasionally provide substantial market declines - and even panics - that will affect virtually every stock. Nobody can say when these traumas will occur - not me, not Charlie, not the economists, not the media. Meg McConnel, from the New York Fed, describes the reality of panics: “We spend a lot of time looking for systemic risk; in fact, however, it is the risk that tends to find us.”

During these scary periods, we must never forget two things: First, generalized fear is an investor's friend because it makes bargains available. Second, personal fear is our enemy. And it's also unreasonable. Investors who avoid high and unnecessary costs and simply hold a collection of conservatively funded large American businesses in their portfolios for long periods of time will almost certainly have good returns.”