Warren Buffett: Two things to remember during scary periods

“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks,” Warren Buffett said in his FY2016 letter to Berkshire Hathaway shareholders.

“No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”,” said Mr Buffett.

What should investors do during such scary periods?

“…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well,” said Mr Buffett, who is chairman and CEO of Berkshire Hathaway.

Mr Buffett started his thought on this subject by saying: “America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.

” American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.”

Taking a dig at naysayers, Mr Buffett said: “Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle. ”

Then driving home a point about reality, Mr Buffett said: “Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. ”

Mr Buffett went on to talk about the two things that investors should not forget during such scary periods.

 

Why Warren Buffett sold about one-third of stake in IBM

Warren Buffett, who owned about 81 million shares in IBM at the end of 2016, sold off about a third of that stake in the first and second quarters of 2017.

He told CNBC this in a report dated May 4, 2017 (Warren Buffett has sold IBM shares, and ‘revalued’ tech icon downward, cites ‘big strong competitors’).

Mr Buffett’s FY2016 letter to Berkshire Hathaway, of which he is chairman and CEO, showed that at end-2016, the company owned  81,232,303 shares in IBM. The cost was US$13,815 million. “This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-downs that have been required under GAAP rules,” said Mr Buffett in the shareholder letter.

Berkshire Hathaway first bought into IBM in 2011. A Reuters report (Nov 24, 2011) headlined “Buffett sheds tech aversion with big IBM investment” said: “Warren Buffett has always made his distaste for technology investments clear, but on Monday he changed his ways in spectacular fashion. The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp (IBM) stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.”

At that time in 2011, Mr Buffett was also  quoted as saying in an interview on cable television network CNBC that he was struck by IBM’s ability to retain corporate clients, which made it indispensable in a way that few other services were.

Why then did he slash the stake in 2017? The CNBC May 4, 2017, report on Mr Buffett’s slashing of the IBM stake quoted him as saying: “I don’t value IBM the same way that I did 6 years ago when I started buying… I’ve revalued it somewhat downward.”

“When it got above $180 we actually sold a reasonable amount of stock,” said Mr Buffett.

According to Mr Buffett, IBM hadn’t performed the way he had expected — or the way IBM’s management had expected — when he first started buying the shares six years ago.

“IBM is a big strong company, but they’ve got big strong competitors too,” said Mr Buffett.

Mr Buffett also said he had stopped selling. At that point, IBM shares were trading below US$160.